Business Group Spillovers

Naaraayanan, L and Wolfenzon, D (2024) Business Group Spillovers. Review of Financial Studies, 37 (1). pp. 231-264. ISSN 0893-9454

Abstract

We compare the investment of standalone firms across regions after a positive shock to the investment opportunities generated by a large-scale highway development project. We show that the standalones' investment sensitivity is lower in regions with a higher density of business groups in the local area. We investigate mechanisms driving our results and find support for a financing mechanism whereby banks allocate capital preferentially to group-affiliated firms in responding to the increase in credit demand. Overall, our study documents that business groups have spillover effects on standalone firms.