Default risk in business groups

Elisa Luciano and Giovanna Nicodano

No 283, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: This paper analyzes how combining firms into either groups or conglomerates affects their credit standing, as measured by their de- fault probabilities, recovery rates and credit spreads. Each combina- tion offers protection against default to its affiliates, and issues debt to optimize the trade-off between tax gains and default costs. In a group, the probability of joint default turns out to be lower than that of both stand-alone firms and conglomerates. This is the bright side of credit risk in groups. The dark side is that affiliation depletes the credit worthiness of the subsidiary. Such results hold irrespective of cash- ow correlation, if affiliates are equal in size, but fade if the parent is larger.

Keywords: credit risk; structural models; groups; mergers; parent- subsidiary. (search for similar items in EconPapers)
JEL-codes: G32 G33 G34 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2012
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:283

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