Business Group Performance in China: Ownership and Temporal Considerations

We address the institutional void hypothesis that suggests affiliation with a business group will improve a firm's performance in circumstances of poor quality institutions and extensive market failures. Prior research provides mixed evidence for this view and there is little research on how institutional development affects the value of affiliation. Since 1997 China has experienced significant improvement in institutional and market infrastructure. We hypothesize that initial positive effects of group affiliation should decline as the quality of market institutions improves. Further, we hypothesize that differences in state and private ownership will influence the value and persistence of firm affiliation. Using data on some 470 publicly listed firms in 1999 and 2004 we find support for a temporal hypothesis that affiliation with a business group improves performance but the value of group affiliation declines over time. We also find support for a state 'helping hand' hypothesis that suggests firms with high-levels of state ownership initially experienced an amplified value effect from their group affiliation, which disappeared by 2004. The results suggest that China's policy makers are beginning to establish an institutional and market infrastructure that is conducive to entry by unaffiliated, freestanding firms.