Strategic Management JournalStrat. Mgmt. J., 25: 525–539 (2004)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.394

ASSET RESTRUCTURING AND BUSINESS GROUPAFFILIATION IN FRENCH CIVIL LAW COUNTRIES

ROBERT E. HOSKISSON,1* ALBERT A. CANNELLA, JR.,2 LASZLO TIHANYI3and ROSARIO FARACI41 W. P. Carey School of Business, Arizona State University, Tempe, Arizona, U.S.A.2 Mays Business School, Texas A&M University, College Station, Texas, U.S.A.3 Michael F. Price College of Business, University of Oklahoma, Norman, Oklahoma,U.S.A.4 University of Catania, Catania, Italy

We examine the relationship of environmental antecedents to asset restructuring in nine Frenchcivil law countries in Latin America and Europe. In these countries, business group affiliationhelps member firms to access resources, take advantage of environmental opportunities, andneutralize threats. Results indicated that environmental antecedents, such as change in countrydevelopment, increased competition and deregulation led to increased asset restructuring. Moreimportantly, however, we also found that the influence of environmental factors was moderatedby business group membership. The relationship between change in country development andrestructuring was stronger for group-affiliated firms and the effects of increased competitionand deregulation on asset restructuring were stronger for primarily independent firms. Ourstudy offers additional evidence that organizations may respond differently to environmentalopportunities and threats depending on the institutional setting. Copyright 2004 John Wiley& Sons, Ltd.

Asset restructuring has been a popular means fororganizations to respond to threats and opportu-nities in their business environments (Duhaimeand Grant, 1984; Hitt, Harrison, and Ireland,2001; Hoskisson and Hitt, 1994; Markides, 1992).Restructuring commonly involves ‘a sequence ofacquisitions and divestitures to develop a new con-figuration of the lines of business’ (Bowman andSingh, 1993: 6). When the environment is chang-ing, firms that restructure their set of businessesmay improve the chances of achieving synergiesand increase their performance (Bethel and Liebes-kind, 1993; Bergh, 1998; Johnson, 1996).

Most prior studies have examined asset restruc-turing in the United States and the United King-dom, but restructuring has become a widely obser-ved strategy for responding to environmental

Key words: asset restructuring; business groups; institu-tional context; legal systems*Correspondence to: Robert E. Hoskisson, W. P. Carey Schoolof Business, Arizona State University, PO Box 874 006, Tempe,AZ 85287-4006, U.S.A. E-mail: rhoskiss@ou.edu

changes in other institutional settings (e.g., Changand Hong, 2000; Filatotchev, Buck, and Zukov,2000). For example, financial crises and privatiza-tion policies have led to an increase in restructur-ing activities by Latin American and Asian firms.However, prior research on corporate restructur-ing may have a limited generalizability to differ-ent regions due to the variations in institutionalsystems around the world (La Porta et al., 1998).A potentially important institutional difference inmany (perhaps most) countries is firms’ affiliationwith large diversified business groups (Khanna andPalepu, 2000a). Such group affiliation in differentcountries may have a profound effect on firms’restructuring.

Business groups are dominating forces in theindustries of many countries and membership inthese groups is likely to play a role in howfirms respond to environmental challenges. Busi-ness groups are generally composed of legallyindependent firms that are bound by formal andinformal ties to take coordinated actions (Khanna

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526 R. E. Hoskisson et al.

and Rivkin, 2001). These groups often serve asorganizational substitutes for imperfections in cap-ital, labor, and product markets (Chang and Choi,1988; Leff, 1976). Whereas business groups mayhave a unified set of entrepreneurs or managers,they cannot be classified as ‘fully integrated’ orga-nizational structures (Guillen, 2000). Nonetheless,business group affiliation can provide firms accessto substantial tangible and intangible resourcesthat are typically unavailable to independent firms(Chang and Hong, 2000). Our conceptualization inthis paper goes beyond the dominant prior researchfoci of antecedents and profit implications of busi-ness group affiliation by concentrating on howgroup affiliation influences corporate-level actionwhen pressures from environmental change arepresent. Indeed, despite the limited empirical evi-dence, restructuring by business groups is one ofthe most important challenges firms and govern-ments face in many countries (Hoskisson et al.,2001; Khanna and Palepu, 1999).

This study focuses on business groups in LatinAmerica and Europe. Our sample countries shareFrench civil law traditions, leading to contexts inwhich firms are likely to benefit from businessgroup affiliation. Rooted in Roman law, Frenchcivil law has been adopted by many countries,including countries of Latin America, from theirformer European settlers or colonizers (David andBrierley, 1985). In contrast to nations with Englishcommon law traditions, French civil law countrieshave relatively poor investor and creditor protec-tion and weak law enforcement (La Porta et al.,1997). Partly due to these institutional characteris-tics, French civil law countries usually have highownership concentration in the form of businessgroups (La Porta et al., 1998). Furthermore, asbusiness groups appear to exist in many countriesregardless of the level of economic development(e.g., Ghemawat and Khanna, 1998; Khanna andRivkin, 2001), the French civil law context pro-vides a setting with sufficient variation to general-ize the role of business group affiliation in firms’asset restructuring.

We examine the interactive effects of a setof environmental antecedents and business groupaffiliation on restructuring through a mail surveyof corporate executives from nine French civil lawcountries. The research question we address iswhether business group affiliation leads to loweror higher levels of restructuring in response to

environmental opportunities and threats. Further-more, our approach contributes to what has beenpartly examined in the prior restructuring literatureregarding the relationship between environmen-tal characteristics and restructuring (e.g., Berghand Lawless, 1998) by investigating three keyareas: country development, competitive environ-ment, and government regulation. The context ofour sample provides an opportunity to extendrestructuring research beyond the U.S. and U.K.environments.

THEORY AND HYPOTHESES

A body of restructuring literature considers assetrestructuring as a strategic response by firms tochanges in their environment (Chatterjee, 1992;Meyer, Brooks, and Goes, 1990). Restructuringresearch focusing on the effects of governmentregulations and competition (e.g., Ginsberg andBuchholtz, 1990; Rajagopalan and Spreitzer, 1997;Zajac and Kraatz, 1993) has made important con-tributions to the previous restructuring literaturedominated by agency theory (Johnson, 1996). Forexample, the study by Bergh and Lawless (1998)found that restructuring is related to changes inenvironmental uncertainty. Results of this studyalso indicate that firm diversification may influ-ence the relationship: highly diversified firms tendto divest during times of increased environmen-tal uncertainty and pursue acquisitions when envi-ronmental uncertainty is decreased. Other stud-ies along this line suggest that responding tochanges in the environment by restructuring canlead to benefits through jointly managing a salesforce, assembling a corporate task force of capableindividuals, or sharing marketing and technologyoperations (Hill and Hoskisson, 1987; Markidesand Williamson, 1996). Furthermore, the effectsof environmental changes on restructuring havebeen found to depend on additional factors, suchas competitive position, organizational size, andfinancial resources (Zajac and Kraatz, 1993).

Asset restructuring has been increasing world-wide owing to a number of recent changes inthe global environment, such as economic devel-opment, global competition, regional integration,financial crises, and changes in government poli-cies in both developing and developed economies(Hitt et al., 2001; Megginson and Netter, 2001).Because of the magnitude of these changes, the

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extension of research on the environment–assetrestructuring relationship to different country envi-ronments, such as countries of French civil lawtraditions, is an important endeavor. For instance,although firms in this institutional setting mayrespond to a number of environmental changes byrestructuring, important differences are expectedbased on firms’ affiliation with large diversifiedbusiness groups.

Environmental changes and asset restructuringin French civil law countries

There are a number of environmental changesthat incline firms in French civil law countries torestructure their assets. Of these, the change incountry development should be among the mostimportant because it leads to critical opportunitiesand threats to which firms may need to respondby restructuring their asset portfolios. Despite itsimportance, little prior research has considered thelink between change in country development andrestructuring. Factors related to country develop-ment include Gross Domestic Product, develop-ment of human capital, level of inflation, levelof employment, and life expectancy. The devel-opment of a country is also closely linked to othersocial and political factors. For example, changingattitudes toward business in a society may limit orincrease market opportunities and political reformsmay result in changes in the role of private own-ership (Megginson and Netter, 2001).

Country development tends to be associated withincreased governance by market forces, leading tomore efficient resource allocation. Change in coun-try development has two main effects on firms.First, the improved efficiency in resource alloca-tion leads to an increase in business opportunities.The availability of capital and an educated workforce facilitate the growth of firms. Frequently,firms can better exploit these opportunities byrestructuring their assets (Bethel and Liebeskind,1993). Second, the increasing socio-economic sta-bility associated with country development reducesthe risks of doing business and therefore is likely toincrease the entry of foreign as well as local firms(Wan and Hoskisson, 2003). Under these condi-tions, firms may improve their chances of acquir-ing resources by selling unrelated businesses andacquiring related businesses (Bergh, 1998; Berghand Lawless, 1998).

Hypothesis 1a: Change in country developmentis positively associated with asset restructuringin French civil law countries.

Changes in competition are among the most impor-tant environmental factors for corporate executivesto consider in restructuring (Johnson, 1996). Theentry of new competitors increases the level ofcompetition and can reduce profit margins in anindustry. Competition might intensify because ofthe diversity of strategies by firms in an industry,a shift in the power balance of players, and changesin market demand (Porter, 1980). These effectsare particularly relevant in the context of foreigndirect investment in many countries of French civillaw traditions. Multinational firms as new entrants,often from English common law countries, possessthe necessary outside resources, such as capitalfrom their home markets, to change the compet-itive landscape of local industries and the marketposition of local firms.

To meet the challenges of increasing rivalry,executives of firms are often encouraged to takemore risk and often respond by asset restructuring(Cool, Dierickx, and Jemison, 1989). Grinyer andMcKiernan (1990) found that competitive changeslead to an ‘aspiration-induced crisis.’ Firms inFrench civil law countries may respond by restruc-turing their assets; frequently by acquiring relatedbusinesses and divesting unrelated ones. Whenthe competitive environment changes, restructur-ing helps firms to allocate resources, realize syn-ergies, and improve performance (Bergh, 1995,1998; Chatterjee, 1986; Hoskisson and Hitt, 1988).These restructuring benefits may be particularlycritical to firms in French civil law countriesbecause of the limited opportunities to obtainresources from outside sources, such as capitalmarkets (La Porta et al., 1997). Thus,

Hypothesis 1b: Increased competition is pos-itively associated with asset restructuring inFrench civil law countries.

Another important antecedent of restructuring, thelevel of government regulation, is a tool to con-trol excessive risk-taking at the firm level: whenan economy is highly regulated, organizations arefaced with limited discretion in their business deci-sions (Wiseman and Catanach, 1997). Because ofthe aforementioned market failures, governmentsin French civil law countries tend to act more as

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resource allocators than governments of countrieswith English civil law traditions do (La Porta et al.,1998). However, to solve macro-economic ineffi-ciencies, governments of French civil law coun-tries have substantially decreased their economicinvolvement in recent years (Megginson and Net-ter, 2001). The reduction of government involve-ment increases the decision-making discretion offirms, improves the efficiency of governance mech-anisms, and reduces the barriers to trade andinvestments (Ramamurti, 2000). Reduced govern-ment intervention, nevertheless, raises the level ofuncertainty for firms due to the increase in thediversity of stakeholders, the appearance of newlyprivatized firms, and an accompanying increase inthe likelihood of bankruptcy (Megginson and Net-ter, 2001).

Regulatory changes are positively related tochanges in firm risk-taking behavior and strate-gies, such as acquisitions (Datta, Narayanan, andPinches, 1992; Ginsberg and Buchholtz, 1990).Under deregulation, less-focused, defender-likefirms tend to change to more focused, prospector-like strategies (Rajagopalan and Spreitzer, 1997).Divestiture from unrelated businesses may pro-vide means for firms to respond to deregulationin French civil law countries by realizing syner-gies from their reduced portfolio of operations andachieving positive wealth effects for their share-holders (Meyer et al., 1990).

Hypothesis 1c: Deregulation is positively asso-ciated with asset restructuring in French civillaw countries.

The interaction effects of environmentalchanges and business group affiliation

Beyond the direct effects of environmental chang-es, firms’ propensity to restructure their assetsmight be influenced by their affiliation to diver-sified business groups in French civil law coun-tries. The long-term survival of business groupsin these countries seems to contradict the widelyheld theoretical argument that high levels of prod-uct diversification are detrimental to firm per-formance (Hoskisson et al., 2001; Khanna andPalepu, 2000a; Khanna and Rivkin, 2001). Firmsaffiliated with business groups can continuouslyrealign their assets and financial resources andincrease their political power in dealing with

national and local governments (Encarnation,1989; Lincoln, Gerlach, and Ahmadjian, 1996).

When there is a change in the level of countrydevelopment, the opportunity of group-affiliatedfirms to restructure their assets is likely higherthan that of independent firms. Group affiliation inFrench civil law countries can facilitate access toresources during times of economic growth whendemand for resources is high (Chang and Hong,2000). Firms with strong links to business groupscan obtain superior information about investmentopportunities, gain access to other firms’ resources,and take advantage of the growing supply of edu-cated labor. Furthermore, business group memberslikely have better chances to acquire other firmsby relying on their group’s internal capital market(La Porta et al., 1997).

Change in country development may alsoprompt business groups to restructure their oper-ations to improve their odds of survival. Guillen(2000) suggests that business groups may notsurvive when asymmetries in foreign trade andinvestment disappear in a country. For exam-ple, the power of Spanish business groups hasdeclined since Spain’s increased integration intothe European Union. Because business groupshave emerged in response to institutional voidsin many economies, their role may become con-strained with the development of market institu-tions (Ghemawat and Khanna, 1998; Khanna andPalepu, 2000a; La Porta et al., 1997). Thus, changein country development may provide a strongerpush for group-affiliated firms to restructure theirassets.

Hypothesis 2a: Group affiliation will moder-ate the relationship between change in countrydevelopment and asset restructuring in Frenchcivil law countries in such a way that the rela-tionship will be stronger for group-affiliatedfirms.

The variation in organizational responses to com-petitive change (e.g., Bergh and Lawless, 1998;Johnson, 1996) is likely to be profound in Frenchcivil law countries. Although changes in coun-try development may have a stronger effect onthe restructuring of business group-affiliated firms,

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changes in competition may increase the restruc-turing of independent firms. Business groups repli-cate the functions of missing intermediating insti-tutions, such as product, labor, and capital mar-kets in French civil law countries and thus enabletheir member firms to deal more efficiently withimperfect property rights, weak contract enforce-ment, and information problems (Khanna andPalepu, 2000b; Ghemawat and Khanna, 1998).Access to distribution channels, financial resourcesfrom other group member firms, and group brandnames can provide buffers for group-affiliatedfirms when they are faced with increased com-petition. Along this line, prior research noted therisk-sharing benefits of business group affiliationthrough bank relationships and interlocking share-holdings (Sheard, 1994). Financial distress of amember firm, for example, tends to lead to con-certed group-wide rescue operations, often headedby a group-affiliated bank (Suzuki and Wright,1985). A potential negative effect of such accessto these group resources is the relative inflexi-bility of business group members in respondingto changes in the competitive environment (Hilland Hoskisson, 1987). Independent firms with-out these linkages, on the other hand, will havemore flexibility to make adjustments in the face ofcompetition.

By operating in multiple markets, group-affilia-ted firms are able to leverage market power inindividual markets and thus are less vulnerableto increased competition from local or multi-national firms. Further, business group-affiliatedfirms can offer their unique resources to new multi-national entrants, such as reputation in local mar-kets (Khanna and Palepu, 2000b). Whereas firmswithout links to business groups need to respond tocompetitive changes by restructuring their assets,this is likely less critical for firms with businessgroup affiliation.

Hypothesis 2b: Group affiliation will moderatethe relationship between competitive change andasset restructuring in French civil law coun-tries in such a way that the relationship will bestronger for independent firms.

Responses to changes in government regulationsare also likely to be affected by affiliation withbusiness groups. Because of their size, businessgroups directly influence the state of economies

and the level of employment and, thus, govern-ments in French civil law countries tend to mon-itor group performance closely (La Porta et al.,1998). Close ties to government agencies can allowgroup-affiliated firms to benefit from favorable reg-ulatory treatments. Furthermore, group-affiliatedfirms have better access to state resources duringhigh government regulation. Some of these relativeadvantages of group affiliation, however, may dis-appear with decreasing government involvement,and when the opportunity for acquisitions declines.For instance, the waning political connections andlimited access to state resources make affiliatedfirms less attractive partners in acquisitions (Encar-nation, 1989).

In turn, deregulation, including privatizationof state assets, may increase the propensity toacquire among independent firms. Other elementsof deregulations, such as the reduction of taxes andtariffs, may reduce the previous levels of preferen-tial treatment given to diversified business groupsand a larger population of unaffiliated firms canaccess resources to acquire new lines of business.Independent firms may also restructure their assetportfolios to take advantage of trade liberalizationpolicies. As deregulation opens up local marketsto a wider range of firms for export or foreigndirect investment, independent firms may restruc-ture their assets to benefit from these opportuni-ties. Thus, asset restructuring is expected to bestronger among independent firms during dereg-ulation.

Hypothesis 2c: Group affiliation will moderatethe relationship between deregulation and assetrestructuring in French civil law countries insuch a way that the relationship will be strongerfor independent firms.

METHODS

We used a survey to test our hypotheses aboutthe relationship between environment, restructur-ing, and group affiliation in Latin America, includ-ing Argentina, Brazil, Chile, Colombia, Mexico,Peru, and Venezuela, and in Europe, such as Italyand Spain. The legal systems of the selected coun-tries are based on French civil law traditions andthus provided an appropriate setting for this study(David and Brierley, 1985; La Porta et al., 1998).Furthermore, the institutional conditions of these

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countries have been identified by prior empiricalstudies as environments in which diversified busi-ness groups are present (Ghemawat and Khanna,1998; Guillen, 2000; Khanna and Rivkin, 2001).The largest firms and their executives per coun-try with publicly available data were identifiedthrough the Worldscope database. Further infor-mation on Latin American firms was providedby the Sao Paolo, Brazil branch of the interna-tional consulting firm, Arthur D. Little. We sentsurveys to multiple respondents per firm in 1996and sent a second copy of the survey to non-respondents. From the 1400 surveys mailed out,68 were returned as undeliverable, and a totalof 252 completed surveys were returned, yield-ing a response rate of about 19 percent, a typicalresponse rate in cross-national studies (Jobber andSaunders, 1988). Because of the moderate responserate, non-response bias raised a legitimate concern.To check for potential non-response bias, we con-ducted t-tests for differences in two control vari-ables: performance and size. Data for these tests,involving return on investment and the number ofemployees, were collected from Worldscope. Wefound no significant differences between respon-dents and non-respondents by country, suggestingthat non-response bias did not overly influence thefindings.

Measures

Asset restructuring

We assessed our dependent variable using fouritems, including (1) the ratio of acquisition todivestitures (e.g., Bergh and Lawless, 1998),(2) the percentage of total sales due toacquisitions (e.g., Hitt et al., 1996; Simmonds,1990), (3) the importance of acquisitions, and(4) the importance of divestitures. The twoimportance-of-restructuring items, (3) and (4),were the composite of different motivations forasset restructuring measured by seven-point Likert-type scales. Using multiple components from priorliterature (e.g., Hitt et al., 2001; Hoskisson andHitt, 1994; Johnson, Hoskisson, and Hitt, 1993)broadened the scope of the traits and increasedthe content validity of our measure (Ghiselli,Campbell, and Zedeck, 1981). The factor loadingsfor the four items of asset restructuring were 0.65,0.66, 0.70, and 0.74. Cronbach’s alpha for thecombined measure was 0.70. The survey itemsused in this study are presented in the Appendix.

Independent variables

Change in country development was measuredby the 5-year average of Human DevelopmentIndex (HDI). HDI is a composite of (1) adjustedreal GDP per capita (in Purchasing Power Par-ity $), (2) educational attainment (combined first-,second-, and third-level gross enrollment),(3) adult literacy, and (4) life expectancy. HDIindexes were collected from the United NationsDevelopment Programme’s Human DevelopmentReports 1992–1996. Change in a country’s HDIis an appropriate measure for this study becauseit reflects changes in a country’s developmentand its economic potential, and is relatively freefrom income inequalities (Lubatkin, Ndiaye, andVengoff, 1997; Streeten, 1994). Furthermore, puremacro-economic indicators do not accuratelydepict country development for businesses because‘economic development can neither be achievednor sustained if it does not promote or encouragehuman development’ (Zahra, 1999: 38).

Competitive change was measured by usingthree items on the survey: (1) change in local com-petition, (2) change in access to the local marketby foreign competitors, and (3) access to capital.Responses were made on seven-point Likert-typescales. The factor loadings were 0.86, 0.85, and0.74. Cronbach’s alpha for the composite scale was0.88.

Deregulation was assessed by using four items:(1) number of government regulations with whichthe company must comply, (2) liberalization inthe government’s attitude toward domestic acquisi-tions, (3) changes in government policy regardingprivatization, and (4) export liberalization. Theseitems were measured by seven-point Likert-typescales. The factor loadings of the four items were0.72, 0.64, 0.61, and 0.63. We summed the fouritems and obtained a Cronbach’s alpha of 0.71.

Group affiliation

Because of the complex and informal links amongfirms in diversified business groups, public data ongroup affiliation may be unavailable or mislead-ing (Khanna and Palepu, 2000b, Guillen, 2000).Our moderator variable, group affiliation, is adummy variable based on three survey items:(1) the importance of a commercial bank whichhas ownership in the firm, (2) importance of affil-iated partner firms which have ownership interest

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in the firm, and (3) importance of other compa-nies in which the firm has ownership interest. Theresponses were on seven-point Likert-type scales.The three items had factor loadings of 0.72, 0.75,and 0.68. Cronbach’s alpha reliability estimate ofgroup affiliation was 0.72. This combined surveyitem was used to divide our sample into busi-ness group-affiliated firms and primarily indepen-dent firms, to match classification in prior stud-ies on business group affiliation (e.g., Guillen,2000; Khanna and Palepu, 2000a). The mediansplit resulted in 92 business group-affiliated firmsand 106 independent firms.

Control variables

We included six control variables: firm perfor-mance; size; diversification; international diver-sification; country political risk; and industry.Firms with poor performance, for instance, tend toview changes in the environment as more signif-icant and accordingly are prompted to restructuretheir operations to improve performance. However,poor-performing firms lack the resources to makeadjustments in their asset portfolios (Duhaime andGrant, 1984). Performance was assessed by usingthree survey-based items: (1) return on invest-ment, (2) increase of sales revenue, and (3) pre-tax profit. The factor loadings of these Likert-type items were 0.86, 0.89, and 0.89, respectively.We summed these items and obtained a Cron-bach’s alpha estimate of 0.94 for the performancemeasure.

Firm size may be important because large firmshave the resources to acquire other businesseswhen their managers view opportunities in theenvironment or are often pressed to sell unprof-itable operations, making restructuring a more fre-quent strategy. Firm size was measured by thenumber of employees.

Level of diversification might be relevant forrestructuring, as highly diversified firms may needto respond to environmental threats or opportuni-ties by reducing their diversified scope (Chang,1996). Level of diversification was measured byinverse of the sales of the largest business unitdivided by total sales. Size and diversification mea-sures were collected from the respondents and theWorldscope database.

International diversification is another poten-tially important variable that might be associatedwith asset restructuring. Firms, for instance, may

divest from their business operations because ofthe problems in their international portfolios. Inter-national diversification was measured by the num-ber of countries with foreign subsidiaries (countryscope) and was obtained from our survey respon-dents (Tallman and Li, 1996).

There might be variation in asset restructuringacross countries of French civil law traditions. Weincluded the 5-year average of country politicalrisk to assess the general political and economicenvironment of our sample countries (e.g., Brewer,1985; Uhlenbruck and De Castro, 2000). We col-lected this variable from the Political Risk Year-book published by Political Risk Services.

Lastly, firms might be affected by environmen-tal changes differently, depending on their indus-try membership. We constructed nine industrydummy variables and included them in the analy-ses, following Amburgey and Miner (1992). Basedon their primary industry, firms were dividedinto extractive, processing, equipment manufac-turing, electronics, construction, other manufactur-ing, telecommunication, trade, and other servicesindustry groups. We used effect coding, as we hadno preference to select any industry as a referencecategory (Kerlinger and Pedhazur, 1973).

It is important to acknowledge that the data inthis study were obtained using self-report mea-sures. Campbell and Fiske (1959) note that com-mon method bias can pose problems for surveyresearch that relies on self-reported data, especiallyif the data are provided by the same person at thesame time. We employed Harman’s single-factortest to estimate the extent of common method vari-ance. If common method variance is a problem, asingle factor should emerge from a factor analysiswith most of the covariance in the independent anddependent variables (Podsakoff and Organ, 1986).The analysis found six factors with eigenvaluesgreater than one, with the first one explaining20.6 percent of the variance. These results indicatethat common method variance was not a seriousproblem.

Because we had multiple respondents, we calcu-lated the interrater reliability by using the coeffi-cient of agreement. While this measure is similar tothe intraclass correlation index (e.g., Jones et al.,1983), it is preferred in small-groups responses(Robinson, 1957). The coefficients were 0.64(restructuring), 0.88 (competitive change), 0.69(deregulation), 0.66 (group affiliation), and 0.95(performance). Thus we averaged the multiple

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responses from the same firm for the subsequentanalyses, resulting in a final sample of 198 firms.

RESULTS

Table 1 presents the means, standard deviations,and correlations for all the variables. We per-formed a confirmatory factor analysis (CFA) onthe survey items to evaluate the fit of the mea-surement model. The sample covariance matrixwas used as input for the CFA in ESQ 5.7b. Fitstatistics included the comparative fit index (CFI),the normed fit index (NFI), and the root-mean-square error of approximation (RMSEA) (Hu andBentler, 1985). We used maximum likelihood esti-mation and achieved an acceptable fit (CFI = 0.95,NFI = 0.90, RMSEA = 0.07). The chi-square testof our model was significant (χ 2 = 178.76, d.f. =96, p < 0.001); however, the inspection of these fitindexes suggests that fit of the measurement modelis satisfactory for further analyses (Anderson andGerbing, 1988; Bollen, 1989).

Hierarchical regression analysis was used to testthe hypotheses. In the model, the control vari-ables were entered in the first step, the indepen-dent variables in the second step, group affilia-tion in the third step, and the interaction termsin the fourth step. All models also include thenine industry dummy variables; however, only thesignificant industry effect (other manufacturing)is reported. To control for the potential multi-collinearity in the interaction terms, we used adeviation score approach and centered the vari-ables (Jaccard, Turrisi, and Wan, 1990). We exam-ined the Variance Inflation Factors (VIF) and allof the scores were below 1.52 (VIFs over 10normally indicate multicollinearity). These resultssuggested that multicollinearity was not a seriousproblem (Belsley, Kuh, and Welsch, 1980). Theresults of the hierarchical regression are shown inTable 2.

The results of the first regression model indicatea positive effect of size, a marginal positive effectof international diversification, and a marginal neg-ative industry effect on the dependent variable(R2 = 0.13, F = 2.09, p < 0.05). The results oftesting Hypotheses 1a, 1b, and 1c of the maineffects are presented in Model 2. The positive betacoefficients for change in country development(β = 0.16, p < 0.05), competitive change (β =0.16, p < 0.05) and deregulation (β = 0.17, p <

0.05) indicate relationships between these variablesand restructuring. Thus, Hypotheses 1a, 1b, and1c received support. Model 2 indicates a signifi-cant effect for the independent variables over thecontrol variables (�R2 = 0.06, �F = 4.71, p <

0.01). The group affiliation variable is entered inModel 3. This model indicates a marginally posi-tive main effect for group affiliation on restructur-ing over the independent variables (β = 0.13, p <

0.10, �R2 = 0.02, �F = 3.31, p < 0.10).Hypothesis 2a states that business group affilia-

tion will moderate the relationship between changein country development and restructuring withthe relationship stronger for group-affiliated firms.The results of Model 4 indicate a significantpositive interaction between country developmentand group affiliation (β = 0.14, p < 0.05). Con-sequently, Hypothesis 2a is supported. Hypothe-sis 2b states that business group affiliation willmoderate the relationship between competitivechange and restructuring with the relationshipstronger for independent firms. The results ofModel 4 indicate a significant negative interac-tion between competitive change and group affil-iation (β = −0.24, p < 0.01), providing supportfor Hypothesis 2b. Hypothesis 2c predicts thatbusiness group affiliation will moderate the rela-tionship between deregulation and restructuringwith a stronger relationship for independent firms.The results of the regression analysis provide sup-port because the coefficient is negative and sig-nificant (β = −0.21, p < 0.01). The results, pre-sented in Model 4, demonstrate that the interac-tion terms accounted for a significant amount ofincremental variance beyond that due to the maineffects (�R2 = 0.07, �F = 6.10, p < 0.01). Tobetter explain the moderating effect of businessgroup affiliation on the relationship between envi-ronmental antecedents and asset restructuring, weplotted the interactions in the graphs shown inFigures 1–3 using one standard deviation belowand above the mean (Cohen and Cohen, 1983).

DISCUSSION

This study extends research on restructuring byexamining the association between various envi-ronmental antecedents and asset restructuring inFrench civil law countries. We found that LatinAmerican and European firms may restructuretheir assets during changes in their countries’

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Asset Restructuring and Business Groups 533

Tabl

e1.

Mea

ns,

stan

dard

devi

atio

ns,

and

corr

elat

ions

a

Var

iabl

esM

eanb

S.D

.1

23

45

67

89

10

1.R

estr

uctu

ring

11.5

42.

452.

Perf

orm

ance

14.5

84.

440.

103.

Size

3.43

0.67

0.25

∗∗∗

−0.0

44.

Div

ersi

ficat

ion

0.62

0.26

0.02

0.02

−0.0

75.

Inte

rnat

iona

ldi

vers

ifica

tion

23.7

832

.32

0.17

∗0.

040.

23∗∗

−0.2

3∗∗

6.Po

litic

alri

sk0.

880.

12−0

.11

0.10

−0.0

9−0

.02

0.04

7.In

dust

ry(o

ther

man

ufac

turi

ng)

0.15

0.44

−0.1

7∗−0

.07

−0.1

1−0

.04

−0.0

6−0

.13†

8.C

hang

ein

coun

try

deve

lopm

ent

0.78

0.06

0.11

0.06

−0.0

40.

01−0

.05

−0.0

40.

27∗∗

9.C

ompe

titiv

ech

ange

14.2

04.

940.

11−0

.07

−0.0

70.

05−0

.01

−0.0

5−0

.05

−0.0

510

.D

ereg

ulat

ion

14.0

34.

230.

13†

0.10

0.02

0.09

−0.2

0∗∗−0

.23∗∗

0.09

0.23

∗∗−0

.24∗∗

11.

Gro

upaf

filia

tion

0.46

0.50

0.08

0.03

0.06

−0.1

0−0

.07

0.01

−0.0

4−0

.07

0.07

−0.0

2

an

=19

8.†p

<0.

10;

∗ p<

0.05

;∗∗

p<

0.01

;∗∗

∗ p<

0.00

1b

Uns

tand

ardi

zed

mea

nsan

dst

anda

rdde

viat

ions

are

repo

rted

for

stan

dard

ized

item

sto

sim

plif

yin

terp

reta

tion.

Spea

rman

Ran

kco

rrel

atio

nsar

ere

port

edw

here

ordi

nal

data

are

used

.

Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 525–539 (2004)

534 R. E. Hoskisson et al.

Table 2. Results of hierarchical regression analysis

Variable Model

1 2 3 4

Step 1Performance 0.10 0.07 0.07 0.08Size 0.21∗∗ 0.22∗∗ 0.21∗∗ 0.19∗∗

Diversification 0.06 0.04 0.06 0.04International diversification 0.13† 0.15† 0.16∗ 0.16∗

Country political risk −0.10 −0.04 −0.04 −0.03Industry (other manufacturing) −0.13† −0.16∗ −0.16∗ −0.14∗

Step 2Change in country development 0.16∗ 0.17∗ 0.18∗

Competitive change 0.16∗ 0.15∗ 0.09Deregulation 0.17∗ 0.17∗ 0.14†

Step 3Group affiliation 0.13† 0.13†

Step 4Change in country development × group affiliation 0.14∗

Competitive change × group affiliation −0.24∗∗

Deregulation × group affiliation −0.21∗∗

R2 0.13 0.19 0.21 0.28�R2 0.13 0.06 0.02 0.07Adjusted R2 0.07 0.12 0.13 0.20Model F 2.09∗ 2.68∗∗ 2.75∗∗∗ 3.45∗∗∗

�F 2.09∗ 4.71∗∗ 3.31† 6.10∗∗

Standardized coefficients: n = 198.†p < 0.10; ∗p < 0.05; ∗∗p < 0.01; ∗∗∗p < 0.001

-0.25

-0.2

-0.15

-0.1

-0.05

0

Change in Country Development

Infl

uenc

e on

Ass

et R

estr

uctu

ring

Group-Affiliated Firms Independent Firms

Figure 1. Group affiliation and change in country development interaction

development, competition, and deregulation. Theseresults enhance prior literature (e.g., Bergh, 1998;Markides, 1992; Rajagopalan and Spreitzer, 1997)by examining the effects of three different

segments of the environment on restructuring,including change in country development, an im-portant variable that has received relatively littleprior attention.

Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 525–539 (2004)

Asset Restructuring and Business Groups 535

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

Competitive Change

Infl

uenc

e on

Ass

et R

estr

uctu

ring

Group-Affiliated Firms Independent Firms

Figure 2. Group affiliation and competitive change interaction

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

Deregulation

Infl

uenc

e on

Ass

et R

estr

uctu

ring

Group-Affiliated Firms Independent Firms

Figure 3. Group affiliation and deregulation interaction

More importantly, this study investigated thepotential differences in asset restructuring in awell-defined institutional setting (La Porta et al.,1998). Drawing from the growing body of researchon business groups (e.g., Caves and Uekusa, 1976;Ghemawat and Khanna, 1998; Khanna and Palepu,2000a), the study uncovered evidence that firms incountries of French civil law traditions may havea different stake in restructuring, depending ontheir group affiliation. Thus, this study potentially

contributes to the existing restructuring literatureby showing that group affiliation is an importantmoderator of the relationship between environmen-tal change and asset restructuring in countries ofFrench civil law traditions.

The regression analysis revealed thatgroup-affiliated firms tend to restructure their assetswhen their country’s macro-economic conditionsimprove. Figure 1 illustrates the relativelystronger relationship between change in country

Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 525–539 (2004)

536 R. E. Hoskisson et al.

development and asset restructuring for group-affiliated firms. There may be different reasonsfor this relationship and thus the restructuring ofgroup-affiliated firms has important implications.For example, if the development of a country isderived from a broad economic and social infras-tructure (e.g., human capital, technology, and nat-ural resources), as opposed to the development oftransactional infrastructure (e.g., property rights,legal and contractual institutions), it is likely thatbusiness groups will continue to be important play-ers (Khanna and Palepu, 1999). Alternatively, ifthe institutional infrastructure has evolved to thepoint where group membership no longer providesbenefits, the group structure may be a roadblockto restructuring and government actions may benecessary to foster downscoping of such groups(Chang, and Hong, 2000; Guillen, 2000). Sincesignificant transition efforts are underway in manyFrench civil law countries, the restructuring ofbusiness groups is a central issue for the govern-ments of these countries.

The results and the form of interaction onFigure 2 indicate a stronger effect by competi-tive change on asset restructuring for indepen-dent firms. Similarly, the plot on Figure 3 portraysa stronger relationship between deregulation andasset restructuring for independent firms than forfirms with group affiliation. These results con-tribute to recent empirical research on diversi-fied business group performance (e.g., Chang, andHong, 2000; Guillen, 2000; Khanna and Rivkin,2001) by showing the interactive effect of groupaffiliation and environmental change on a criticalcorporate strategy, asset restructuring. The combi-nation of complementary resources, such as cap-ital, know-how, distribution, and the ability towin government favors, may help group-affiliatedfirms to cope with the uncertainties resulting fromincreased competition and deregulation. Indepen-dent firms, on the other hand, are more likely torestructure their assets under these environmentalpressures. The asset restructuring may help inde-pendent firms to improve their business focus andgain further flexibility. The joint examination ofthe three environmental effects also has impor-tant policy implications considering that businessgroup-affiliated firms are more likely to restruc-ture their assets in response to changes in countrydevelopment and are less influenced by competi-tive and regulatory changes.

The results of this study introduce opportuni-ties for future research. First, this study identifiedassociations between environmental changes andrestructuring and not causal relations. It is likelythat additional environmental, organizational, andindividual characteristics have important effects oncorporate restructuring. For example, acquisitionstend to have a high failure rate and managers maydecide to sell acquired businesses when they nolonger see their potential (Hitt et al., 2001; John-son, 1996). Additionally, although we did not findrelationships between restructuring, performance,and diversification, prior empirical results suggestthat these and other variables may have an effecton corporate restructuring. Subsequent researchcould examine the potential effects of firm strat-egy and managerial characteristics on restructuringin addition to the environmental antecedents, thefocus of the present investigation. Another poten-tial extension is related to the institutional dif-ferences across countries. Because of additionalinstitutional variation, there are differences amongbusiness groups in different countries. These dif-ferences may be important for the restructuring ofaffiliated firms.

CONCLUSION

This study included firms from different develop-ing and developed countries of Latin America andEurope. Our identification of these countries wasbased on their shared tradition of French civil law,relying on the findings of La Porta and colleagues(1998). Based on prior research, we argued that theinstitutional setting of our sample countries has tra-ditionally provided a role for diversified businessgroups. Our results contribute to prior research byexamining corporate restructuring in French civillaw countries and showing the effect of businessgroup affiliation on the environment–restructuringrelationship. The results of this study highlight theneed for more research on how group affiliationaffects strategic choices in different institutionalsettings.

ACKNOWLEDGEMENTS

The authors gratefully acknowledge the support ofa grant from the Center for the Study of WesternHemispheric Trade at Texas A&M University and

Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 525–539 (2004)

Asset Restructuring and Business Groups 537

support of Arthur D. Little & Co., of Sao Paolo,Brazil, and Roberto Haaland. Thanks are also dueto Lorraine Eden, Rick Johnson, Bill Megginson,SMJ Associate Editor Karel Cool, and two anony-mous reviewers for their helpful comments.

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Asset Restructuring and Business Groups 539

APPENDIX: MEASUREMENT SCALESOF THE DEPENDENT, INDEPENDENT,AND MODERATOR VARIABLES

Asset restructuring

1a. How many businesses has your companybought in the past five years?

1b. During the past five years, how many busi-nesses has your company sold to other firmsor liquidated?

2. Approximately, what percent of your com-pany’s overall sales are due to these acqui-sitions?

3. How much does your company’s strategy ofbuying other businesses emphasize each of thefollowing?1

(Likert scale: 1–7, scale anchors: not at all—very much)3a. Buying businesses because they are for

sale at low prices.3b. Buying businesses because they have po-

tential but need capital which your com-pany can supply.

3c. Buying businesses so that your companycan improve market share.

4. During the past five years, how important haveeach of the following objectives been in lead-ing to a restructuring decision? By restructur-ing we mean sizeable changes in the numberof businesses owned by your firm. (Likertscale: 1–7, scale anchors: not at all—verymuch)4a. Improving overall profitability.4b. Reducing costs.

1 The factor loadings for the components of item 3 are 0.75,0.69, and 0.59, and for item 4 are 0.85 and 0.88. The compositescores for item 3 and 4 are the mean scores of their componentsto recapture scale (Ghiselli et al., 1981).

Competitive change

In the past five years, how much have each of thefollowing changed for your company?

(Likert scale: 1–7, scale anchors: decreased—increased)

1. The number of local producers making productsthat compete with those your company sells.

2. The level of difficulty foreign companies haveselling products in your local markets.

3. Your company’s ability to raise capital.

Deregulation

In the past five years, how much have each of thefollowing changed for your company?

(Likert scale: 1–7, scale anchors: decreased—increased)

1. The number of government regulations withwhich your company must comply (reversecoded).

2. Government policy toward making domesticacquisitions.

3. Government policy toward purchases of priva-tized businesses.

4. Ease of your access to foreign markets forexporting products and services.

Group affiliation

How important are each of the following to yourcompany?

(Likert scale: 1–7, scale anchors: not at all—very much)

1. A bank which has a large ownership interest inyour company.

2. Partner companies which have ownership inter-est in your company.

3. Other companies in which your company hasownership interest.

Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 525–539 (2004)