Trust, Business Group Decentralization, and Firm Productivity

This paper examines how trust among ultimate owners and their affiliates shapes business group structure and correlates with firm productivity. We first confirm that greater business group verticality is associated with higher firm productivity. We then develop a theoretical model explaining how bilateral trust influences group verticality. To test these predictions, we construct a novel dataset by developing an algorithm that extends Amadeus ownership links into ownership chains, allowing us to measure verticality for a large European sample. We find that groups with higher average trust among members are more vertically structured. Firm-level estimates indicate that more trustworthy affiliates are positioned in a layer closer to the ultimate owner and exhibit higher productivity. Results are robust to using somatic distance as an instrument for bilateral trust.