How Asset Specificity Affect the Allocation of Power in Business Groups?

The existing literature has studied the impact of decision-making power allocation on resource allocation performance in business groups, but has not paid attention to the influencing factors of decision-making power allocation. The parent company of a business group has dual relationships of equity control and industrial chain with its subsidiaries. The parent company entrusts the general equity capital to the management of the subsidiaries to purchase specific assets for production and operation activities to obtain profits. The parent company will choose the optimal degree of control over the subsidiaries of the group. In this paper, the theoretical analysis considering the dual relationships shows that the higher the degree of asset specificity of business groups, the higher the optimal degree of centralization, for the needs of protecting specific assets and coordinating the operations of various divisions. The empirical study based on the sample of Chinese A-share listed companies (business groups) from 2007 to 2021 supports the theoretical analysis results. The overall asset specificity of the company has a significant positive impact on the degree of centralization of the parent company. This impact is stronger in the companies with larger scale and higher uncertainty, and weaker in the regions with higher trust level and judicial efficiency, and in the companies with higher digitalization, corporate governance level and growth. The above results are robust to different measurement methods of asset specificity and centralization, and are still valid after PSM and instrumental variable methods are used to solve endogenous problems. The level of asset specificity has no significant impact on the concentration of cash flow required by the internal capital market. These results can help understand the influencing factors of economic organization form and business group governance