Business Groups: Panics, Runs, Organ Banks and Zombie Firms

Asli M. Colpan and Randall Morck

No 29035, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Business groups often contain banks or near banks that can protect group firms from economic shocks. A group bank subordinate to other group firms can become an “organ bank” that selflessly bails out distressed group firms and anticipates a government bailout. A group bank subordinating other group firms can extend loans to suppress their risk-taking to default risk, preserving risk-averse low-productivity zombie firms. Actual business groups can fall between these polar cases. Subordinated group banks magnify risk-taking; subordinating banks suppress risk-taking; yet both distortions promote business group firms’ survival. Limiting intragroup income and risk shifting, severing banks from business groups, or dismantling business groups may mitigate both distortions; but also limits business groups’ internal markets, thought important where external markets work poorly.

JEL-codes: F65 G01 G21 G23 N2 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn, nep-fdg and nep-isf
Note: CF
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Published as Colpan, A.M. and Morck, R.K. (2022), "Business Groups: Panics, Runs, Organ Banks and Zombie Firms", van Tulder, R., Verbeke, A., Piscitello, L. and Puck, J. (Ed.) International Business in Times of Crisis: Tribute Volume to Geoffrey Jones (Progress in International Business Research, Vol. 16), Emerald Publishing Limited, Bingley, pp. 69-88.

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