Abstract: In the context of family controlled business groups, where principal-principal issue is more crucial, agency theory offers a partial view. This study investigates the relationship between the implied cost of capital and reputation of the business groups. Our main thesis is that the spread between the cash flow right and control rights is perceived to be a risk factor by the market for the low reputation business groups, and it will increase the implied cost of capital for not so reputed business groups. On the other hand market allows cross investments to highly reputed business groups. The implied cost of equity might be low for reputed business groups, when the crossholding is directed towards protecting the minority shareholders from the exploitation of entrenched management.

Abstract: This study offers a theoretical and empirical analysis of how firms can strategically use contractual clauses in shareholder agreements to create successful partnerships. We examine the contract specifications used in over 400 shareholder agreements of Bovespa-listed firms in Brazil from 1998-2008. We develop a unique shareholder protection index to measure shareholder’s motives in contractual clauses and assess the effects on performance. We argue that success in strategic contracting is contingent on the composition of the shareholder group. Control groups composed of group-affiliates, family members, or many small stakeholders perform better with contract clauses that create and maintain control. However, partnerships between business group affiliated firms and minority shareholders perform better when employing anti-tunneling clauses and conciliatory control concessions that reduce the risk of expropriation.

Abstract: Accumulated theory and empirical evidence have suggested that access to new resources is a prime motive for collaborative ventures. In parallel, research indicated that inter-organizational knowledge transfers may enable firms to enhance their resource base. This study aims to integrate both perspectives. We investigate to what extent firms can form collaborations in order to acquire the resources necessary to subsequently expand independently. Data on new product introductions in the aircraft industry indicate that collaborative know-how enhances the ability of firms that were formerly in collaborations to unveil their own designs whereas the level of causal ambiguity of the resources accessed in cooperation and the time elapsed since the latest collaborative efforts decrease it. We then discuss how our study contributes to the inter-organizational learning literature.

Abstract: This paper investigates the effect of financial development on the incentives to form business groups. We examine how this relation varies across exogenous industry conditions, legal environments, and firms’ life cycle. Since correlations from cross-country regressions are hard to interpret in the causal sense, we use exogenous industry measures to investigate the channel through which financial development affects group affiliation. Using a new comprehensive firm-level dataset on group affiliation covering fifteen European countries, we find that countries with less developed financial markets have a disproportionately higher percentage of group affiliates in industries with high levels of external financial dependence and asymmetric information. We interpret this finding as an indication that firms in less developed equity and debt markets join business groups to benefit from their significant internal capital markets.

Abstract: This paper argues that, in choosing partners with whom to share knowledge, people work harder to avoid risk than to seek gains. Because of this natural inclination towards risk avoidance and a propensity to search as directly as possible, people merely satisfice when it comes to gains from exploration and exploitation. Although gain maximization is often the stated objective, we argue that it is rarely a reality. We develop a decision making model in which people seek to minimize risk and satisfice gains by calculating the likely interactional outcomes of working with a partner as a function of trust, accessibility, and complementary assets. We show that when trust is high, the proclivity to search based on risk minimization is attenuated and gain maximization becomes a distinct possibility.

Abstract: Resource allocation in multi-divisional firms is often characterized by information asymmetry and agency behavior of divisional managers. We argue that the effect of divisional interests on resource allocation is contingent on the nature of projects: “Socialist” cross-subsidies are more likely to occur when projects are risky and when their identification requires more divisional expertise. Examining the knowledge-sourcing alliances of the world’s 50 largest pharmaceutical firms from 1999 to 2004, we find that weakly-positioned therapeutic areas form more alliances involving highly ambiguous and risky early-stage technologies. In contrast, strongly-positioned therapeutic areas tend to obtain less risky but costlier late-stage technologies. The results highlight a challenge that multi-divisional firms face: The unique divisional expertise that facilitates inter-firm alliances also reduces the efficiency of intra-firm coordination.