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

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 group banks suppress risk taking; yet both distortions promote business group firms’ survival. Limiting intragroup income and risk shifting, severing banks from business groups, articulating Business Group Law, or dismantling business groups may mitigate both distortions but also limits business groups’ internal markets, which are thought to be important where external markets work poorly.

Citation

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, Leeds, pp. 69-88. https://doi.org/10.1108/S1745-886220220000016006