Performance of Business Groups in China from 2000 to 2015 -Comparing Several Hypotheses-

Abstract

This paper studies longitudinal performance of business groups in China from 2000 to 2015. There is a downward trend of group firms relative to non-group firms. There are several hypotheses regarding the downward trend, which are market hypothesis, agency cost hypothesis, resource-based hypothesis, diversification hypothesis and business cycle hypothesis. Traditional theories regarding group firms are tested. As a result, the market hypothesis and agency cost hypothesis are proven, while resource-based hypothesis is refuted. We find that there is an overall diversification premium, but excessive diversification would lead to diversification discount. Furthermore, group firms perform better in periods of economic expansion and relatively high economic growth. Therefore, business group performances could vary according to the market, agency problem, degree of diversification and the business cycle. We conclude that both firm-level and market-level factors can influence the performance of business groups.