This study empirically examines the influence that business group exerts on the financial distress
risks of non-business group member firms. Using an index developed by Liu et al. (2016) as a
measure of business group influence at industry level, we show that the stronger the business
group influence is, the higher th e financial distress risk of non-business group member firms in
the same industry and the entire industry is. We also find that the influence of business group
comes from the existence of the internal capital market among business group member firms. The
influence of business group is stronger for non-business group me mber firms with high degree
of financial constraint and when the external capital market experiences a negative shock. Overall,
these results indicate that the existence of business group could be detrimental to the financial
health of other firms in the economy.
Keywords：Business Group, Internal Capital Market, Externality, Financial Distress Risk