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Group affiliation and default prediction

Beaver, William H, Cascino, Stefano, Correia, Maria and McNichols, Maureen F. (2019) Group affiliation and default prediction. Management Science, 65 (8). pp. 3559-3584. ISSN 0025-1909

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Identification Number: 10.1287/mnsc.2018.3128

Abstract

Using a large sample of business groups from more than one hundred countries around the world, we show that group information matters for parent and subsidiary default prediction. Group firms may support each other when in financial distress. Potential group support represents an off-balance sheet asset for the receiving firm and an off-balance sheet liability for the firm offering support. We find that subsidiary information improves parent default prediction over and above group-level consolidated information possibly because intra-group exposures are netted out upon consolidation. Moreover, we document that the improvements in parent default prediction are decreasing in the extent of parent-country financial reporting transparency which suggests that within-group information matters most when consolidated financial statements are expected to be of lower quality. We also show that parent and other group-firms’ default risk exhibits predictive power for subsidiary default. Lastly, we find that within-group information explains cross-sectional variation in CDS spreads. Taken together, our findings contribute to prior literature on default prediction and have direct relevance to investors, credit-rating agencies and accounting regulators.

Item Type: Article
Official URL: https://pubsonline.informs.org/journal/mnsc
Additional Information: © 2018 INFORMS
Divisions: Accounting
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
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 > G33 - Bankruptcy; Liquidation
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Sets: Departments > Accounting
Date Deposited: 31 May 2018 11:38
Last Modified: 20 Oct 2019 23:03
URI: http://eprints.lse.ac.uk/id/eprint/88139

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