Bankruptcy in Groups

74 Pages Posted: 20 Aug 2015 Last revised: 10 Dec 2016

William H. Beaver

Stanford University

Stefano Cascino

London School of Economics

Maria M. Correia

London School of Economics and Political Science

Maureen F. McNichols

Stanford University

Date Written: December 10, 2016

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.

Keywords: Bankruptcy, Credit risk, Business groups, Subsidiaries, Veil piercing, Related-party transactions, Regulation

JEL Classification: G14, G15, G38, M41, M48

Suggested Citation

Beaver, William H. and Cascino, Stefano and Correia, Maria M. and McNichols, Maureen F., Bankruptcy in Groups (December 10, 2016). Stanford University Graduate School of Business Research Paper No. 15-48. Available at SSRN: https://ssrn.com/abstract=2646916 or http://dx.doi.org/10.2139/ssrn.2646916

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Stefano Cascino

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 7955 6457 (Phone)
+44 (0)20 7955 7420 (Fax)

HOME PAGE: http://www.lse.ac.uk/accounting/people/stefano-cascino

Maria M. Correia (Contact Author)

London School of Economics and Political Science ( email )

Houghton St
London, London WC2A 2AE
United Kingdom

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)
650-725-7979 (Fax)

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