Abstract

The effect of business groups on economic performance is controversial, both theoretically and empirically. We hypothesized that the seemingly contradictory empirical results can be explained by the differentiated governance structure of the business groups and, in particular, the role of social ties (family ties and interlocking directorates). Using a sample of Chilean firms, we analyzed the effects of social ties on the economic performance of firms affiliated to business groups. Our results support the hypothesis that the ownership-control structure (i.e., economic rights and voting rights) affects performance both directly and in interaction with social ties. Social ties improve performance when the concentration of voting rights is low, and when the voting rights of the controlling shareholders are aligned with their economic rights. © 2005 Elsevier Inc. All rights reserved.