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This study investigates the association between business groups’ influence and the capital allocation efficiency of firms outside the business group. We use a sample of Korean firms (1987 to 2010) to compute an annual index of the collective strength and dominance of large business groups (LBGs) per industry. We discover that this index is negatively associated with non-LBG firms’ industry-level capital allocation efficiency during a period characterized by underdeveloped financial markets and weak investor protection. The negative association is stronger in industries that may lack collateral or internal equity capital. We also find that the negative association strengthens when we limit our analyses to the index component exogenous to non-LBG firms’ capital expenditures, suggesting that the relationship is causal. The results also survive a battery of robustness checks.

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