On the functioning of business groups: economic rationale, financial structure and performance

Business groups are organizational forms which stand in the middle between hierarchies and markets, in the sense that they formally rely upon within-boundaries mechanisms of coordination while occasionally replicating market-like methods. Business groups (hereinafter also BGs) are collections of independent firms bound together under a unique ownership that gain some advantage from common affiliation. In my dissertation, I explore the role played by business groups in Italy in different periods of time. I describe the main features of Italian business groups (predominantly family- or state-owned) while assessing their relevance within the national industrial landscape. Once determined the effective composition of Italian control pyramids, I try to verify whether (i) internal capital markets do exist and the extent to which they work actively and efficiently; (ii) group affiliation facilitates member firms in terms of performance, capital structure choices and financial outcomes in both good and bad times. The thesis consists of three chapters. The first chapter reviews and systematizes the extant literature on business groups, with the aim of identifying avenues for future research through survey of past scholarship. The second chapter investigates how an exogenous shock affects capital reallocation among firms affiliated to business groups and their subsequent investment decisions. We use unique financial and accounting micro-data which allow us to have a deep knowledge of the ownership links between member firms. Thus, we reconstruct almost all Italian business groups as hierarchies. Our sample period encompasses the global 2008 financial crisis, a natural event which is likely to exacerbate external financial constraints and, consequently, the impact of internal capital markets on funds distribution. In particular, we test whether intra-group transfers provide BG-affiliated firms with a substantial financing advantage when compared to their (similarly constrained) standalone peers. Finally, the third chapter extends evidence collected in the second essay and compares a cohort of affiliated firms with a cohort of comparable independent ones to measure the potential advantage group members may have vis-à-vis independent ones in performance outcomes during times of market turmoil.