Visibility versus complexity in business groups: Evidence from Japanese Keiretsu

In this article, we examine the potential for external conflicts in large, diversified business groups. On the one hand, these highly visible groups f acilitate the detection of opportunistic actions. Accordingly, reputational concerns should effectively constrain group behavior. On the other hand, t hese groups' complexities hinder outsiders from unveiling group strategies from among a myriad of transactions. This complexity limits the power of re putational concerns to constrain actions. Using data on initial public offe r initial returns, we evaluate the trade-off between visibility and complex ity. The evidence suggests that complexity dominates visibility, providing scope for opportunistic behavior against outside investors.