Bankruptcy in groups

Beaver, William, Cascino, Stefano ORCID: 0000-0002-6703-741X, Correia, Maria ORCID: 0000-0002-1766-9427 and McNichols, Maureen (2018) Bankruptcy in groups. Systemic Risk Centre Discussion Papers (81). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

Text (dp-81) - Published Version Download (1MB)

• Author
• Author
• https://www.systemicrisk.ac.uk/publicati...

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.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.systemicrisk.ac.uk/
Additional Information:	© 2018 The Authors
Divisions:	Accounting
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
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:	31 May 2023 23:03
Last Modified:	01 Oct 2024 03:20
URI:	http://eprints.lse.ac.uk/id/eprint/118925

Actions (login required)

View Item