Business Groups and Employment

Using a newly assembled 50 country firm-level database spanning 19 years, we document that business group affiliated firms display substantially less pronounced fluctuations in employment than unaffiliated firms in response to economic shocks. The results are robust to a variety of tests designed to mitigate a variety of endogeneity concerns, including placebo tests of failed mergers and acquisitions that would have created new group affiliations. We find no evidence that internal capital markets, agency problems, or a different performance sensitivity to economic shocks in groups are responsible for these results. Rather, the results appear to be consistent with the presence of internal labor markets.