Business groups and economic downturn

What is it about?

Pakistan has experienced a period of financial liberalization with rapid growth as well as a period of slow economic growth due to domestic issues during the last two decades. The inconclusive and conflicting time-driven findings motivated us to revisit the performance of business groups in Pakistan. Consistent with the institutional and transaction cost theories, overall, our findings suggest the superior performance of group-affiliated firms as compared to independent firms. The group-affiliated firms outperform during the economic downturn, while underperform during the liberalization and rapid growth phase of the economy. These findings are more pronounced in the firms affiliated with medium-sized business groups as compared to small and large business groups. More observable integration and facilitation of business groups during the crisis period do not generate excess value. However, the superior performance of business group affiliates is linked with better management of group-level resources, aggressive cross-subsidization, and co-insurance in access to financing.

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Photo by JESHOOTS.COM on Unsplash

Photo by JESHOOTS.COM on Unsplash

Why is it important?

The authors extend the literature by providing fresh evidence related to the performance of business groups in the Pakistani context while accounting for the role of the size of business groups.