Bankruptcy in Groups
104 Pages Posted: 20 Aug 2015 Last revised: 18 Jun 2021
Date Written: June 18, 2021
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. 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. Moreover, we show that business groups are more prone to support subsidiaries whose insolvencies expose the group to the risk of veil piercing. Importantly, we document that recent regulatory changes on approval and disclosure of related party transactions are costly for business groups in that they constrain their ability to shield their subsidiaries from credit-risk shocks. Our study informs the current regulatory debate on related party transactions by highlighting an important cost of anti-self-dealing regulation.
Keywords: Bankruptcy, Credit risk, Business groups, Subsidiaries, Veil piercing, Related-party transactions, Regulation
JEL Classification: G14, G15, G38, M41, M48
Suggested Citation: Suggested Citation