The Costs of Group Affiliation: Evidence from East Asia

Abstract

We examine the costs of business group affiliation using data for 2,600 firms in nine East Asian economies for the 1994-1996 period. We find that group-affiliated firms are on average valued below independent firms, with the discount attributable to firms whose ultimate owners have voting rights exceeding cash-flow rights. When there is no divergence between voting and cash flow rights, group-affiliated firms actually have a slight value premium over independent firms. Our results are robust to different valuation measures, time periods and estimation techniques. The evidence is consistent with the view that the anticipation of expropriation associated with group affiliation more than offsets any possible benefits of group membership.