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Bankruptcy in groups

Beaver, William H, Cascino, Stefano ORCID: 0000-0002-6703-741X, Correia, Maria and McNichols, Maureen F. (2023) Bankruptcy in groups. Review of Accounting Studies. ISSN 1380-6653

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Identification Number: 10.1007/s11142-023-09779-4

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.

Item Type: Article
Official URL: https://www.springer.com/journal/11142
Additional Information: © 2023 The Author(s).
Divisions: Accounting
Subjects: H Social Sciences > HG Finance
H Social Sciences > HF Commerce > HF5601 Accounting
JEL classification: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited: 04 Apr 2023 16:15
Last Modified: 27 Feb 2024 20:00
URI: http://eprints.lse.ac.uk/id/eprint/118590

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