Bankruptcy in Groups

• In Event: Debt Contracting II

Abstract

We examine bankruptcy within business groups. Using a large cross-country sample of group-affiliated firms, we show that group structure matters for parent and subsidiary bankruptcy prediction. The association between parent and subsidiary default probabilities varies with the level of subsidiary integration within the group and country-level institutional quality. A shock to the parent probability of default is less likely to propagate to subsidiaries in countries with strong anti-self-dealing, investor protection, director liability and related-party transaction regulations. Our evidence is consistent with intra-group credit risk management in the form of propping and tunneling of funds among group firms.

Authors

• William H Beaver, Stanford Graduate School of Business

• Stefano Cascino, London School of Economics and Political Science

• Maria Correia, London Business School

• Maureen McNichols, Stanford University