Business Groups and Risk Sharing around the World

We use a new database from fifteen emerging markets as well as from prewar and modern Japan to examine the popular view that business groups - ubiquitous in most emerging markets - facilitate risk sharing by smoothing the performance of affiliated firms. We replicate existing results on risk sharing by Japanese keiretsu, find evidence of risk sharing in some other countries (e.g. Korea, Thailand), and very limited evidence of "liquidity smoothing" in one country, India. However, in most countries, our estimates of risk sharing are usually not statistically significant. Tests of two-dimensional first-order-stochastic-dominance suggest that the Japan result - that group affiliated firms have both lower levels of operating profitability and lower standard deviations of operating profitability - does not generalize to most emerging markets. We also find no correlation between the extent of capital market development and the extent of risk sharing provided by business groups. The popular view of the importance of risk sharing in business groups is thus not validated by our analysis.