We propose a novel identification strategy for estimating the effects of business group affiliation. We study two-firm business groups, some of which split up during the sample period, leaving some firms as stand-alone firms. We instrument for stand-alone status using shocks to the industry of the other group firm. We find that firms that become stand-alone reduce leverage and investment. Consistent with collateral cross-pledging, the effects are more pronounced when the other firm had high tangibility. Consistent with capital misallocation in groups, the reduction in leverage is stronger in firms that had low (high) profitability (leverage) relative to industry peers. Received July 3, 2017; editorial decision April 7, 2018 by Editor Wei Jiang. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
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We thank the following for their comments and suggestions: two anonymous referees; Vladimir Atanasov (Edinburgh discussant), Klenio Barbosa (Rio discussant), Ruth Bradley, Miguel Ferreira, Francisco Gallego, Wei Jiang (the editor), Jeanne Lafortune, Oguzhan Ozbas (Istanbul discussant), Jeremy Stein, Jose Tessada, Yishay Yafeh, Daniel Wolfenzon (SFS Cavalcade discussant), and Eric Zwick (FinanceUC discussant); and seminar participants at Kentucky, Notre Dame, Nova Lisboa, Rotterdam SoM, the World Bank, the SFS Cavalcade North America 2017, the 4th Edinburgh Corporate Finance Conference, the 10th FinanceUC Conference, the 8th Summer Finance Conference (IDC, Herzliya), the 17th Workshop on Corporate Governance and Investment (Istanbul), and the International Conference on Small Business Finance (FGV, Rio). We are also indebted to Felipe Cabezón, Carla Castillo, Bastien Maire, and Mark Straver for their excellent research assistance. Paul Plaatsman from EDSC and Patrick Oosterling and Cor Aardappel from Bureau van Dijk were extremely helpful in obtaining and processing the data for this paper. G. S. acknowledges funding from Proyecto FONDECYT Regular . This paper previously circulated under the title “The Effects of Business Group Affiliation: Evidence from Firms Being ‘Left Alone.”’ Supplementary data can be found on The Review of Financial Studies Web site. Send correspondence to Borja Larrain, Avenida Vicuña Mackenna 4860, Macul, Santiago, Chile; telephone: (56) 2-2354-4025. E-mail: firstname.lastname@example.org.
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