Bankruptcy in groups

William Beaver, Stefano Cascino, Maria Correia and Maureen 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. In several countries around the world, bankruptcy courts often "pierce the corporate veil" and hold groups liable for their distressed subsidiaries' obligations as if these 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. We find that large and diversified groups are more effective at insulating their subsidiaries from credit-risk shocks. Moreover, the pattern of capital reallocation appears consistent with groups supporting subsidiaries that are easier to monitor and whose insolvencies may spill over to other group firms. Finally, we document that recent regulatory changes on approval and disclosure of related-party transactions may limit groups' ability to shield their subsidiaries from credit-risk shocks.

Keywords: 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: 72 pages
Date: 2018-08-10
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118925

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