Asian Journal of Economics and Empirical Research

This study examines the difference in performances of two business groups, Formosa Plastics Group and Far Eastern Group, under the impact of financial tsunami (2007.10.29~2017.8.10). The aim of this study is to help investors understand the operating model of business groups and use the herding effect to enhance the trading performance in financial markets. The empirical evidence shows that for the Formosa Plastics Group, the news impact curve (based on EGARCH model) including the leading company is flatter when the news impact is less than zero (that is, negative news impact) than the news impact curve excluding the leading company. In contrast, the news impact curve of the Far Eastern Group is steeper when the leading company is included. Moreover, when the leading company is included as an endogeneous variable in the model as a filter for the program trading simulation, results show that investors can profit from the Formosa Plastics Group. Therefore, business groups that include the leading company have lower risks. It is beneficial to the stability of the market trading by incorporating the leverage effect of the leading company in business groups. On the contrary, the leading company of the Far Eastern Group does not have such an effect. The absolute profits and the increment of performance are both lower than that of the Formosa Plastics Group. The results suggest that the diversification strategy of Far Eastern Group is worse than the vertical integration strategy of the Formosa Plastics Group. The implication is that investors should carefully choose the business group for investment if they are to utilize the herding effect in investment.