Are Member Firms of Corporate Groups Less Risky?


  • This paper has greatly benefited from the comments of an anonymous reviewer.


The evidence we uncover suggests that the practice of profit and risk sharing among keiretsu firms reduces the firm level idiosyncratic risk. However, rather than eliminating firm-level risk, it is being transformed into market-level risk. Since market-level risk is priced, this actually destroys shareholders’ wealth. Additionally, the heightened correlation among keiretsu firms essentially diminishes the diversification efficacy of a portfolio of keiretsu firms. In summary, our results suggest that the practice of profit and risk sharing, which on the surface seems to be a blessing, may actually have a detrimental effect on the value of keiretsu firms.