Bankruptcy in groups

William H. Beaver (), Stefano Cascino (), Maria Correia () and Maureen F. McNichols ()
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William H. Beaver: Stanford Graduate School of Business
Stefano Cascino: London School of Economics
Maria Correia: London School of Economics
Maureen F. McNichols: Stanford Graduate School of Business

Review of Accounting Studies, 2024, vol. 29, issue 4, No 13, 3449-3496

Abstract: 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 M48 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-023-09779-4

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