Do Business Groups Change with Market Development?

Journal of Economics & Management Strategy, Forthcoming

57 Pages Posted: 29 Jul 2015

See all articles by Borja Larrain

Borja Larrain

Pontificia Universidad Catolica de Chile

Francisco Urzúa I.

City University London - Bayes Business School

Date Written: July 28, 2015

Abstract

Khanna and Yafeh (2007) hypothesize that business groups should be more common in economies with less developed markets and institutions. We test the time-series version of this hypothesis by looking at changes in Chilean groups over 20 years (1990-2009). In this period, Chile experienced a deep economic transformation as measured by common proxies of market development (e.g., per capita income doubled). Despite this dramatic transformation, groups remained mostly unchanged in terms of relative size, industrial diversification, vertical integration, control structures, internal capital markets, and reliance on external funds (minority equity plus debt). Only leverage increased. Also, group’s initial conditions were uncorrelated with market development at the time of formation. This evidence casts doubts on the institutional-voids hypothesis, although more subtle institutional voids, not captured by the type of macro proxies we use, might explain the existence and resilience of business groups.

Keywords: business groups, development, institutions

JEL Classification: G30

Suggested Citation

Larrain, Borja and Urzua, Francisco, Do Business Groups Change with Market Development? (July 28, 2015). Journal of Economics & Management Strategy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2637012

Borja Larrain

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://sites.google.com/view/borja-larrain

Francisco Urzua (Contact Author)

City University London - Bayes Business School ( email )

United Kingdom

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