Spillover Effects of Capital Expenditure Announcements Within Business Groups
| Date | 01 October 2020 |
| Published date | 01 October 2020 |
| DOI | http://doi.org/10.1111/1467-8551.12379 |
British Journal of Management, Vol. 31, 709–727 (2020)
DOI: 10.1111/1467-8551.12379
Spillover Eects of Capital Expenditure
Announcements Within Business Groups
I-Fen Chen and Shao-Chi Chang 1
General Administration Department, Metal Industries Research & Development Centre, No. 1001 Kaonan
Highway, Kaohsiung Taiwan 1Institute of International Business, National Cheng Kung University, No. 1
University Road, Tainan City 701, Taiwan
Corresponding author emails: winny@mail.mirdc.org.tw, schang@mail.ncku.edu.tw
Using the capital expenditure announcements of Taiwanese business group aliated
firms, this study examines whether the group diversification and ownership structure
influence intragroup spillover eects. We find that the stock price reactions of the an-
nouncing firms are positively associated with both the stock price reactions and the post-
announcement long-term performance of their non-announcing group peers. More impor-
tantly, the evidence shows that this positive spillover eect weakens for business groups
associated with a pyramidal ownership structure. The evidence supports the conjecture
that principal–principal conflicts play an important role in moderating the spillover ef-
fects in a business group. The findings further show that the spillovereects are stronger
during periods of financial crises. Finally, in the 3-yearperiod following announcements,
the non-announcing group members experience declining industry-adjusted performance.
Introduction
This study investigates spillover eects for Tai-
wanese business groups. Specifically, we investi-
gate how the spillover eects can be influenced by
the principal–principal conflicts within a business
group. Prior literature suggests that most business
groups have highly concentrated ownership, and
controlling shareholders often have power over
firms that exceeds their cash flow rights. It is thus
likely for controlling shareholders with an oppor-
tunity to expropriate minority shareholders by ex-
ploiting network ties to transfer resources out of
firms for their private interests (Bae, Kang and
Kim, 2002). The controlling shareholders pursuing
their own private benefits have incentives to trans-
fer resources from firms where they have low cash
flow rights to those where they have high cash flow
rights. The principal–principal conflicts between
controlling and minority shareholders can be es-
pecially serious in developing countries with weak
shareholder protection (Young et al., 2008).
The literature has found that group member
firms experience co-movements in the same busi-
ness group. The spillover eects can result from
resource sharing in both tangible and intangible
assets, business transactions and internal financial
supports among members of the same business
group (Chang and Hong, 2000). Bae, Cheon and
Kang (2008) and Cheung et al. (2014) report that
earnings announcements by a firm have spillover
eects on other member firms. Joe and Oh (2018)
investigate the spillover eects of credit rating
events for Korean business groups and find that
the spillover eects are stronger when driven by
the leading firm of a business group.
Unlike previous research, this paper studies the
eects of the principal–principal problems on the
spillover eects within business groups. We focus
on the spillover eects of corporate investments
on capital expenditure because they are more
likely to generate principal–principal conflicts.
Capital expenditure is among the most important
corporate decisions on growth strategy. It often
involves significant impacts on both cash flow
and the relevant risks of the announcing firms.
Moreover, the impacts of capital expenditure may
further extend to other non-announcing group
firms through the channels of resource sharing
and business transactions in the group network.A
value-creating capital expenditure investment may
indicate a potential increase in the productivity
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710 I-F. Chen and S-C. Chang
and future earnings growth for the announcing
firms (Chen and Ho, 1997; Chung, Wright and
Charoenwong, 1998), and the non-announcing
firms may also gain from the investment. In con-
trast, value-decreasing capital investments may
require resources from other non-announcing
members to help the focal firm. The transfer of
resources in capital expenditure is often associated
with the problem of principal–principal conflicts,
and thus provides a good setting for this study.
To analyse how the spillover eects of business
groups are influenced by the principal–principal
conflicts, this study examines three characteris-
tics of business groups related to the principal–
principal conflicts: (i) group diversification; (ii)
pyramidal ownership structure; and (iii) family
control. In essence, weadvocate an integrative per-
spective,calling not only for explicit considerations
of spillover eects, but also for their integration
with principal–principal conflicts. This paper thus
responds to the calls issued by Bae, Cheon and
Kang (2008), Cheung et al. (2014) and Joe and Oh
(2018) for more integration between spillover ef-
fects and principal–principal conflicts.
We test the hypotheses by examining a sam-
ple of 695 Taiwanese firms that made capital ex-
penditure announcements during the period 2001–
2014. This sample has several advantages that
make it particularly suitable for this task. First,
in Taiwan, many business groups are owned by
a family which wields substantial control and in-
fluence over all the member firms, with the Tai-
wan Economic Journal (TEJ) database reporting
that about 60.56% of Taiwanese business groups
were family controlled in 2017. Second, Taiwan
business groups provide clear data on various as-
pects of group membership, including the pyrami-
dal structure, largest shareholders and directorsof
member firms, along with detailed data on own-
ership ratios. Finally, corporate governance sys-
tems in Taiwan provide relatively weak protection
for outside minority shareholders (Chang, Wuand
Wong, 2010; Chen and Chang, 2016). Therefore,
principal–principal conflicts are more serious in
the sample.
Our empirical analyses reveal that the stock
prices of non-announcing member firms are pos-
itively associated with those of their announcing
peers around capital expenditure announcements,
thereby suggesting the existence of spillover ef-
fects. More importantly, we find that this positive
eect weakens when the group has a pyramidal
ownership structure, implying that principal–
principal conflicts may weaken spillover eects.
Overall, this paper contributes to the literature
in the following ways. First, Joe and Oh (2018)
analyse the spillover eects of business groups.
Our study extends the seminal work of Joe and Oh
(2018) by examining how the spillover eects are
influenced by characteristics of business groups.
We take a dierent research direction and focus
on the role of principal–principal conflicts in the
context of a diversification and ownership struc-
ture in a business group. In this regard, our study
adds additional new insights on the determinants
of the spillover eects of business groups. Second,
prior studies on spillover eects in business groups
mainly investigatefinancial events, including credit
ratings (Joeand Oh, 2018) and earnings announce-
ments (Bae, Cheon and Kang, 2008; Cheung et al.,
2014). To examine the principal–principal con-
flicts, this study investigates investment decisions
on real assets of capital expenditure announce-
ments. Unlike financial events, capital expenditure
often involves greater resource investments and is
more likely to trigger conflicts among stakehold-
ers. It thus provides a better setting to investigate
the principal–principal conflicts driven by group
characteristics across member firms in business
groups. Third, the prior study provides little dis-
cussion on how the general economy can influence
the spillover eects. This study uses the 2008
global financial crisis as a shock and finds that
spillover eects are more evident when there is a
negative shock to the environment. Our results are
consistent with Friedman, Johnson and Mitton’s
(2003) study that controlling shareholders tem-
porarily transfer resources to prop up their group
peers in order to boost their performance during a
financial crisis. Our study is among the pioneering
works that provide supporting empirical evidence
on the influences on the spillover eects of busi-
ness groups. Fourth, the spillover eects can occur
as a result of the structure of business groups and
are thus endogenous variables. Prior research does
not consider this potential bias. To control for this
potential issue, we adopt a two-stageleast-squares
approach to control for potential endogeneity
between cumulative abnormal returns to the
announcing firm and the stock price reactions
of group peers: our results are thus robust to the
endogeneity bias. Finally, we are extending past
research not only to business groups, but also to
empirical studies on governance in Taiwan and
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