آیا گروه های کسب و کار باید بکلی برچیده شوند؟ هزینه های تعادل کارآمد بازارهای سرمایه داخلی

We analyze the relationship between conglomerates’ internal capital markets and the efficiency of economy-wide capital allocation, and we identify a novel cost of conglomeration that arises from an equilibrium framework. Because of financial market imperfections engendered by imperfect investor protection, conglomerates that engage in winner-picking (Stein, 1997 [Internal capital markets and the competition for corporate resources. Journal of Finance 52, 111–133]) find it optimal to allocate scarce capital internally to mediocre projects, even when other firms in the economy have higher-productivity projects that are in need of additional capital. This bias for internal capital allocation can decrease allocative efficiency even when conglomerates have efficient internal capital markets, because a substantial presence of conglomerates might make it harder for other firms in the economy to raise capital. We also argue that the negative externality associated with conglomeration is particularly costly for countries that are at intermediary levels of financial development. In such countries, a high degree of conglomeration, generated, for example, by the control of the corporate sector by family business groups, could decrease the efficiency of the capital market. Our theory generates novel empirical predictions that cannot be derived in models that ignore the equilibrium effects of conglomerates. These predictions are consistent with anecdotal evidence that the presence of business groups in developing countries inhibits the growth of new independent firms because of a lack of finance.

During the 1990s business groups in developing countries, and especially in East Asia, were under pressure to restructure. Although widely regarded as the engine of economic growth in earlier decades, business groups are now blamed by politicians and commentators for the economic problems (slow growth, financial crises, etc.) affecting some regions of the world. Those against the busting up of business groups contend that these organizations substitute for missing markets (Khanna and Palepu, 1997 and Khanna and Palepu, 1999). For example, the presence of business groups could improve economic efficiency because their internal capital markets allocate capital among member firms more efficiently than the underdeveloped external capital market does (Hoshi et al., 1991, Khanna and Palepu, 1997, Stein, 1997 and Perotti and Gelfer, 2001). In contrast, those in favor of dismantling business groups argue, among other things, that business groups inhibit the growth of small independent firms by depriving these firms of finance. (See, for example, Financial Times, 1998, for an account of the difficulties that independent firms faced in obtaining finance before the reform of the Korean chaebols.) Existing models of internal capital markets consider conglomerates in isolation, abstracting from the effects that conglomeration might have on other firms in the economy (see Stein, 2003, for a survey of the literature on internal capital markets).1 However, the argument that conglomeration makes it harder for small independent firms to raise financing is directly suggestive of such externalities. Is it reasonable to expect that a high level of conglomeration hampers the allocative efficiency of the external capital market? If this conjecture were true, it would give rise to important welfare and policy implications. For instance, even if conglomerates’ internal capital markets were efficient (in the sense that conglomerates allocate capital to divisions with the highest growth opportunities), one could not infer that the presence of conglomerates should be encouraged because the benefits of efficient internal capital markets could be outweighed by the negative externalities that conglomerates impose on other firms in the economy. To address these questions, an equilibrium model that considers both internal and external capital markets, and the interactions between them, is needed. We present such a framework in this paper. In our model, capital allocation is constrained by the extent of legal protection of outside investors against expropriation by the manager or insiders (La Porta et al., 1997 and LaPorta et al., 1998). When investor protection is low, there is a limit to the fraction of cash flows that entrepreneurs can credibly commit to outside investors (limited pledgeability of cash flows). Because of this friction, the economy has a limited ability to direct capital to its best users: High-productivity projects might not be able to pledge a sufficiently high return to attract capital from lower-productivity projects. In this setup, a conglomerate that reallocates capital efficiently (Stein, 1997) allocates the capital of a worthless project to its best unit, even if this unit is of mediocre productivity. A conglomerate prefers this internal reallocation even when there are higher-productivity projects in the economy in need of capital, because, as a result of limited pledgeability, the high-productivity projects cannot properly compensate the conglomerate for its capital. In contrast, a stand-alone firm with a worthless project has no internal reallocation options and thus finds it optimal to supply the project's capital to the external market. This difference in the reallocation decisions of conglomerates and stand-alones means that a high degree of conglomeration in a country's corporate sector is associated with a smaller supply of capital to the external market and might, under some conditions, decrease the efficiency of aggregate investment. The model also suggests specific conditions under which conglomerates’ internal capital markets increase allocative distortions. For low levels of investor protection, conglomerates improve allocative efficiency because the external market works so poorly that high-productivity firms cannot raise additional capital irrespective of the amount of capital supplied. Because released capital cannot find its way to high-productivity projects, the reallocation of conglomerates to mediocre units is better than no reallocation at all. For high levels of investor protection, the conglomerates’ internal reallocation bias disappears because high-productivity projects can offer a sufficiently high return to attract capital from the conglomerate. In this case, the external market works so well that the allocation of capital becomes independent of the degree of conglomeration. The negative effect of conglomeration on the external capital market is most pronounced for intermediate levels of investor protection. In such circumstances, the legal and contracting environment is good enough to make it possible for the external capital market to work well. However, the external market's residual underdevelopment makes it fragile to the negative externality engendered by conglomeration. In other words, for intermediary levels of investor protection, the probability that high-productivity firms can raise additional capital is sensitive to capital supply, and thus to the degree of conglomeration. In these cases, the efficiency of capital allocation decreases with conglomeration. Our theory thus predicts that, in some circumstances, an exogenous decrease in conglomeration can improve the efficiency of capital allocation by increasing the availability of finance to high-productivity projects. This prediction is consistent with anecdotal evidence from South Korea. The financing constraints that new independent firms faced in the 1990s were partly attributed to the presence of the chaebols (see Financial Times, 1998). It also appears that following the reform of the chaebols, more funds have become available to independent firms (see, for example, Economist, 2003). Korea is probably at the intermediate stage of institutional development in which the equilibrium effects of internal capital markets are high. While chaebols played an important role in earlier stages of development of the Korean capital market, more recently they could have become a burden as market institutions evolved over time. Clearly, the degree of conglomeration is not completely exogenous because individual entrepreneurs have the choice whether to set up conglomerates or stand-alone firms. Nevertheless, evidence suggests that, in many countries, corporate grouping affiliation is determined to a large extent by history and political pressure (see references in Section 4). Thus, we believe that it is meaningful to model exogenous variations in conglomeration. Nevertheless, we extend the model to allow entrepreneurs to choose whether to set up conglomerates or stand-alone firms. When conglomeration is high, the external market works poorly (as a result of the negative effect of conglomerates on the supply of capital). A poorly developed capital market raises the entrepreneur's incentive to conglomerate because conglomerates need to rely less on the external capital market than stand-alone firms. Thus, when an entrepreneur expects others to conglomerate, he is more likely do to so as well. This positive feedback effect generates multiple equilibrium levels of conglomeration. Finally, we show that social welfare can be higher in the low conglomeration equilibrium. Thus, countries might get stuck in an equilibrium with excessive conglomeration, and yet individual conglomerates have no incentives to break up. Our results contribute to the literature on whether internal capital markets are efficient (Gertner et al., 1994 and Stein, 1997) or not (Shin and Stulz, 1998 and Rajan et al., 2000; Scharfstein and Stein, 2000). We are not the first to point out that conglomerates could have a negative effect on the allocation of capital. Other models also imply that, as the financing-related benefits of conglomeration decrease, costs of conglomeration such as less effective monitoring (Stein, 1997), coordination costs (Fluck and Lynch, 1999), free cash flow (Matsusaka and Nanda, 2002 and Inderst and Mueller, 2003), and incentive problems (Gautier and Heider, 2003) make conglomerates less desirable. However, the literature has focused on conglomerates in isolation and thus has not generated equilibrium implications.2 Our paper, by focusing on the interactions between conglomerates’ internal capital markets and the efficiency of the external capital market, generates a new theoretical insight as well as novel empirical implications and policy recommendations. In terms of the theoretical insight, we add to the literature by identifying a novel, equilibrium cost of conglomeration that stems from the negative externality that conglomerates impose on a country's external capital market. This cost implies that conglomerates can be simultaneously detrimental to equilibrium capital allocation and efficient at allocating capital internally. In addition, our model generates new testable hypotheses and policy recommendations. For example, we predict that a high degree of conglomeration in a country's corporate sector might increase financing constraints for independent firms that lie outside the conglomerate. We also provide reasons for why the dismantling of conglomerates might need to involve government intervention (see Section 7 for a complete list and a discussion of empirical implications and policy recommendations). These implications cannot be generated by models that consider conglomerates in isolation. Our paper is also related to a recent literature that examines the equilibrium implications of private capital allocation decisions in economies characterized by limited investor protection (Shleifer and Wolfenzon, 2002, Castro et al., 2004 and Almeida and Wolfenzon, 2005) and to an earlier literature that analyzes the relationship between general financing frictions and capital allocation (Levine, 1991 and Bencivenga et al., 1995). However, this literature has not considered the equilibrium effects of conglomerates’ internal capital markets, which is the main focus of this paper. This is also the main contribution of our paper to a recent literature that analyzes efficiency and business-cycle properties of capital reallocation (Eisfeldt and Rampini, 2003 and Eisfeldt and Rampini, 2004). We start in the next section by presenting a simple example that illustrates the main effect that drives the novel results of our paper. In Section 3 we describe our full model, and in Section 4 we analyze the effect of an exogenous change in conglomeration on the efficiency of capital allocation. The main result of the paper is stated and explained in Section 4.4. This result is derived under the assumption that conglomerates and stand-alones are initially formed with no external finance. Section 5 relaxes this assumption and shows that the result is robust to the introduction of external finance at the formation date. In Section 6, we extend the model to analyze the implications of endogenizing conglomeration. We discuss the empirical and policy implications of the model in Section 7, and present our final remarks in Section 8. All proofs are in the Appendix.

We develop an equilibrium model to understand how the efficiency of capital allocation depends on the degree of conglomeration. We show that conglomerates can be detrimental to capital allocation even when they have efficient internal capital markets, because of their effect on the efficiency of the external capital markets. Thus, our results suggest that efficient internal capital markets are not a sufficient condition to advocate the presence of conglomerates in developing economies. Conglomeration could impose a negative externality to other firms by making it more difficult for good projects outside the conglomerate to raise funds. Our model is consistent with anecdotal evidence on the role of business groups in developing countries. In particular, the model gives a rationale for why the presence of business groups could inhibit the growth of new independent firms because of a lack of finance. In addition, our model suggests that even when the economy as a whole benefits from having fewer funds allocated through internal capital markets, individual conglomerates cannot be expected to voluntarily dismantle. Thus, there might be a role for policies that directly discourage the presence of conglomerates in developing economies. One way to reinterpret our result is that, in an equilibrium framework, mitigating an agency cost for only a few firms is not necessarily beneficial for the overall economy. This insight could potentially be extended to the literature on financial intermediaries (e.g., Bencivenga and Smith, 1991, Boyd and Smith, 1992, King and Levine, 1993 and Galetovic, 1996). This literature argues that financial intermediaries perform several roles that aid the allocation of capital, such as discovering information about productivity, pooling funds, and diversifying risks. In the context of our model, this reasoning suggests that financial intermediaries could increase pledgeability of cash flows in the economy. However, our results on conglomeration suggest that it is important that banks increase the aggregate pledgeability level (our parameter λλ), as opposed to increasing pledgeability locally for a group of firms with more direct relationships with banks. If the latter occurs, banks might have similar effects to conglomerates: They might at the same time facilitate reallocation of capital across firms in their local relationships and decrease the efficiency of overall reallocation because they compromise reallocation of capital across firms with different banking relationships.