Credit Advantage and Firm Structure: The Benefits of a Separate Corporate Veil
34 Pages Posted: 15 Mar 2011 Last revised: 14 Mar 2012
Date Written: March 13, 2012
We relate the firm legal structure to the degree of credit advantage of the headquarters. We argue that subsidiary-based firms are born as the outcome of a process of agglomeration around firms with better credit advantage. Therefore, subsidiary based firms have better credit advantage than no-subsidiary firms. At the moment of agglomeration (M&A) we document a significant positive relation between the difference in credit advantage between the bidder and the target and the probability of choosing the target, the value created in the M&A, and the likelihood that the target will be retained as a subsidiary. The better the credit advantage of the HQ compared to the subsidiaries, the higher is the percentage of the total financing that takes place at HQ level.
Keywords: separate legal liability, subsidiary based firm, credit advantage, agglomeration, M&As
JEL Classification: G32, G34, L22, L25
Suggested Citation: Suggested Citation