Bankruptcy in Groups

104 Pages Posted: 20 Aug 2015 Last revised: 18 Jun 2021

See all articles by William H. Beaver

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: June 18, 2021

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. 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

Beaver, William H. and Cascino, Stefano and Correia, Maria M. and McNichols, Maureen F., Bankruptcy in Groups (June 18, 2021). 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)

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