Leverage and Value Creation in Holding-Subsidiary Structures

52 Pages Posted: 9 Dec 2009 Last revised: 18 Mar 2010

See all articles by Elisa Luciano

Elisa Luciano

Collegio Carlo Alberto; University of Turin - Department of Statistics and Applied Mathematics

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; EGCI; Netspar

Date Written: December 8, 2009


This paper determines optimal capital structure and value of Holding-Subsidiary structures (HS), when there is a trade-off between bankruptcy costs and taxation. HS have higher firm value than their stand alone counterparts, as the holding provides a guarantee to its subsidiary’s lenders which lowers expected bankruptcy costs, at a given debt level. HS may also reach higher debt capacity, which further increases their value by reducing the tax burden below that of stand alone firms. Optimal debt in the holding and in the subsidiary are respectively lower and higher than in their stand-alone counterparts. Such debt diversity preserves the holding ability to rescue its subsidiary, hence value creation by HS, even with perfect cash flow correlation.

Keywords: holding, subsidiary, groups, guarantees, debt, taxes, bankruptcy costs, limited liability, capital structure

JEL Classification: G32, G34, L22

Suggested Citation

Luciano, Elisa and Nicodano, Giovanna, Leverage and Value Creation in Holding-Subsidiary Structures (December 8, 2009). ECGI - Finance Working Paper No. 268/2009, Available at SSRN: https://ssrn.com/abstract=1520422 or http://dx.doi.org/10.2139/ssrn.1520422

Elisa Luciano

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024

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University of Turin - Department of Statistics and Applied Mathematics ( email )

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Turin, I-10122
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Giovanna Nicodano (Contact Author)

University of Turin - Department ESOMAS ( email )

Turin, 10134

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano/

Collegio Carlo Alberto ( email )

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Torino, Torino 10121
390116705006 (Phone)

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

EGCI ( email )

c/o the Royal Academies of Belgium
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1000 Brussels

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE

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