Bankruptcy in groups

William H Beaver, Stefano Cascino, Maria Correia and Maureen F. McNichols

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We examine bankruptcy within business groups. Groups have incentives to support financially distressed subsidiaries, as the bankruptcy of a subsidiary may impose severe costs on the group as a whole. This is in part because, in several countries, bankruptcy courts often “pierce the corporate veil” and hold groups liable for their distressed subsidiaries’ obligations as if they were their own. Using a large cross-country sample of group-affiliated firms, we show that, by reallocating resources within the corporate structure, business groups actively manage intra-group credit risk to prevent costly within-group insolvencies. Moreover, we document that recent regulatory changes in the approval and disclosure of related party transactions are costly for business groups in that they constrain their ability to shield their subsidiaries from credit-risk shocks. Our study informs the current regulatory debate on related party transactions by highlighting an important cost of anti-self-dealing regulation.

Keywords: bankruptcy; credit risk; business groups; subsidiaries; veil piercing; related party transactions; regulation (search for similar items in EconPapers)
JEL-codes: G14 G15 G38 M41 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2024-12-31
New Economics Papers: this item is included in nep-acc, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Review of Accounting Studies, 31, December, 2024, 29(4), pp. 3449 - 3496. ISSN: 1380-6653

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118590

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