BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 24/2008:
Performance of business groups: Evidence from post-crisis Russia
Andrei Shumilov ()
Abstract: Transition economies like Russia lack properly functioning
financial markets and institutions, which results in severe agency and
information problems. Business groups in such markets have the potential to
offer benefits to member firms, but they also may destroy value. Using a
unique database on membership in Russian business groups, we analyze the
relationship between group affiliation and firm performance on the basis of
a large panel of manufacturing firms for the period 1999-2002. We find that
group membership has a positive effect on productive efficiency, but gains
from improved productivity in group affiliates do not adequately translate
into higher profitability. This is consistent with the expropriation
hypothesis, according to which controlling owners of groups extract private
benefits by siphoning profits from their members. Among the different group
categories delineated by type of controlling owner, the extent of profit
dissipation is especially large in groups controlled by private domestic
owners, who face a greater risk of possible future expropriation of
property. Finally, we examine two potential sources of benefits of
membership in business groups: mutual insurance among affiliated firms and
preferential treatment from the state via subsidies and tolerated tax
arrears. We find that, during the period studied, groups neither provided
mutual insurance nor did they receive larger support from the state than
unaffiliated firms. Together with findings from the previous literature
indicating that, prior to the 1998 financial crisis, group firms benefited
from more efficient allocation of capital within groups than in the rest of
the economy but not after the crisis, our results suggest that the
advantages of group membership recede as the economic and institutional
environment gradually improves.
Keywords: business groups; firm performance; transition economy; Russia; (follow links to similar papers)
JEL-Codes: G30; L20; (follow links to similar papers)
63 pages, November 25, 2008
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