The effect of group affiliation on the risk-taking of Japanese firms

This article examines the role of keiretsu (i.e. business group) affiliation on the risk-taking of Japanese firms. We find that total risk, measured by firm-level stock price volatility, is not significantly affected by keiretsu membership. The reason is that affiliated firms are characterized by lower idiosyncratic risk along with higher systematic risk. However, idiosyncratic risk varies across business groups and appears to depend upon the firm's inclination towards its group. In contrast, the higher systematic risk of group affiliates is significant for each keiretsu and every degree of group inclination. Moreover, this result remains after adjusting risk for firm characteristics and industry effects. Hence, the consequence of group affiliation may more accurately be described by higher systematic risk. This result could reflect the weaker competitive position of keiretsu affiliates.