Effects of Corporate Group Affiliation to Firm Performance in Malaysia

This study attempts to show that firms affiliated to family-controlled business groups are associated with poorer performance compared to firms without such affiliation (independent firms) based on the ROA performance measure. Moreover, the empirical evidence suggests that heterogeneity in these business groups, namely group size and group structure, is important in explaining firm performance. Specifically, firms affiliated to large business groups or business groups with complicated ownership structures perform worse than their counterparts. Allocation of resources as measured by the scaled capital expenditure is also found to be inefficient in firms affiliated to business groups, whereas such inefficiency is not found among the independent firms. The inefficient allocation of resources may offer an explanation for the overall underperformance of the group-affiliated firms compared to the independent firms. The overall findings thus imply that the expanded control over a number of listed member firms made possible by business groups increases the chances of expropriation of firm's resources which may well explain the observed inefficient allocation of resources and reduced firm performance. This observation is more prevalent in large and complicated business groups