Business Group and Its Effect on Financial Distress Risk

Abstract

This study empirically examines the influence that business group exerts on the financial distress risks of non-business group member firms. Using an index developed by Liu et al. (2016) as a measure of business group influence at industry level, we show that the stronger the business group influence is, the higher the financial distress risk of non-business group member firms in the same industry and the entire industry is. We also find that the influence of business group comes from the existence of the internal capital market among business group member firms. The influence of business group is stronger for non-business group member firms with high degree of financial constraint and when the external capital market experiences a negative shock. Overall, these results indicate that the existence of business group could be detrimental to the financial health of other firms in the economy.