The Ubiquity of Business Groups around the World: A Property‐Rights Theory

Abstract Business groups (BGs) are collections of legally independent firms connected by ownership ties and are widely present in both developing and developed economies. We develop property‐rights theory (PRT) to explain this prevalence, extending its scope from the allocation of rights over a bundle of assets to the legal partitioning of assets as another allocative mechanism of property rights. Our conceptual framework complements traditional theories understanding BGs primarily as responses to institutional voids. Drawing on a large global dataset of firms, we examine how firm asset specificity and ownership sharing influence the controlling owners' decision to organize their economic activities as a BG or as a standalone firm. We find that the likelihood of adopting a BG organizational form over a standalone entity increases when (1) controlling owners rely on more firm‐specific assets, and (2) ownership is shared or potentially shared. Moreover, our findings are robust across three commonly observed firm strategic configurations: focused, vertically integrated, and diversified. Our study expands the PRT by developing a theory of property‐rights architecture, moving forward from the institutional voids perspective to explain BGs as efficient governance responses to asset and ownership complexities, hence contributing also to the strategic management and international business literatures.