Is Group Affiliation Profitable in Developed Countries? Belgian Evidence

• Author: An Rommens,Marc Jegers,Marc Deloof,An Buysschaert
• Date: 01 November 2008
• DOI: http://doi.org/10.1111/j.1467-8683.2008.00712.x
• Published date: 01 November 2008

Is Group Aff‌iliation Prof‌itable in Developed

Countries?

Belgian Evidence

An Buysschaert, Marc Deloof*, Marc Jegers and An Rommens

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: It is fairly well established that business group aff‌iliation can compensate for relatively weak

institutions in emerging markets, and in Japan. However, business groups are also common in the EU, and there have not

yet been any studies of business group aff‌iliation and f‌irm performance in the EU. Consequently, we investigate how

business group aff‌iliation affects f‌irm performance in Belgium.

Research Findings/Insights: We f‌ind that operating prof‌itability of group companies is signif‌icantly lower than that of

stand-alone companies, while group companies have more volatile prof‌its than stand-alone companies. Operating prof‌it-

ability of group companies does not depend on the extent of group diversif‌ication. Internal capital markets transfer funds

from good performers to poorly performing group companies. The impact of group aff‌iliation on prof‌itability does not

depend on group age or group ownership.

Theoretical Implications: Our study is, to the best of our knowledge, the f‌irst to investigate how aff‌iliation with a business

group affects company performance in a developed country other than Japan. The results raise the question why business

groups endure in so many developed countries with good investor protection and well-developed capital markets. Some

explanations proposed in the literature are not conf‌irmed.

Practical Implications: Our study offers insights to policy makers and practitioners on the value and the role of business

groups in developed countries. The results raise doubts about the value of these groups in such countries and suggest that

policy makers may want to consider dismantling business groups in EU countries.

Keywords: Corporate Governance, Business Groups, Prof‌itability, Prof‌it Volatility, Internal Capital Markets

INTRODUCTION

In recent years, there has been a growing interest in cor-

porate governance differences between countries. At the

highest level of abstraction, a distinction can be made

between market-oriented and network-oriented systems of

corporate governance (e.g., Moerland, 1995; Weimer and

Pape, 1999). Market-oriented systems are characterized by

well-developed f‌inancial markets, open corporations with

dispersed ownership, and active markets for corporate

control. Network-oriented systems are characterized by

closely held companies and substantial involvement of busi-

ness groups and universal banks in corporate f‌inance and

control. Market-oriented systems prevailin the Anglo-Saxon

countries, while network-oriented systems are prevalent in

most other countries in the world. In many of these coun-

tries, business groups, consisting of large numbers of com-

panies which are linked by networks of share ownership,

interlocking directorates, close market ties, and/or social

ties are the dominant organizational form for managing

large business (e.g., La Porta, Lopez-de-Silanes and Shleifer,

1999; Faccio, Lang and Young, 2001, Yiu, Lu, Bruton and

Hoskisson, 2007).

A growing literature is investigatingthe role of these busi-

ness groups. This literature primarily focuses on emerging

countries, which are often characterized by weak institu-

tions and poorly functioning capital, labor and product

markets (see Khanna and Yafeh, 2007, for a survey). Khanna

and Palepu (2000a; 2000b) and Khanna and Rivkin (2001)

point out that in emerging countries, f‌inancial disclosure is

*Address for correspondence: University of Antwerp, Prinsstraat 13, 2000Antwerp,

Belgium. Tel: +32-3-220-41-69; Fax:+32-3-220-40-64; Email: marc.deloof@ua.ac.be

504 CORPORATE GOVERNANCE

Volume 16 Number 6 November 2008 © 2008 TheAuthors

Journal compilation © 2008 BlackwellPublishing Ltd

doi:10.1111/j.1467-8683.2008.00712.x