Using a sample of 8,790 firm-years between 1993 and 1998, I examine investment policies of firms in Japanese industrial groups relative to independent firms. Contrary to independent firms, there is little evidence that group firms' investment is sensitive to ex-ante proxies of growth opportunities and for the most tightly linked firms in the industrial group there is a negative relation between industry Q and industry-adjusted investment. The difference in the investment pattern for group firms relative to independent firms is directly related to lower excess values for group firms. These findings are consistent with industrial groups decreasing investment efficiency.