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Business Groups in Emerging Markets – Financial Control and Sequential Investment

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  • Christa Hainz

    ()

Abstract

Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.

Suggested Citation

  • Christa Hainz, 2006. "Business Groups in Emerging Markets – Financial Control and Sequential Investment," CESifo Working Paper Series 1763, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1763
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    business groups; self-enforcing contract; institutions; internal capital market;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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