When is a Nexus of Contracts More Firm-Like? Theory and Evidence from Business Groups

When is a nexus of contracts more firm-like? We theoretically and empirically address this question in the context of business groups. We develop a model where assets can be diverted from one group affiliate to another and asset redeployment is more valuable when firms operate in related industries. The group ownership structure affects both the controlling shareholder's propensity to expropriate and the minority shareholders' incentives to monitor. We show that specialized groups choose more vertical structures and may well exhibit greater ownership concentration than diversified groups. We then confirm these predictions using novel and comprehensive data on business groups from 15 European countries. Interestingly, however, we also find substantial cross-country variation