Capital Structure Adjustments of Bank Holding Companies and Subsidiary Failure

47 Pages Posted: 15 Aug 2017

See all articles by Chi-Hsiou Daniel Hung

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

Hong Liu

Loughborough University - School of Business and Economics

Senyu Wang

University of Essex - Essex Business School

Date Written: June 21, 2017

Abstract

A subsidiary failure may deteriorate the bank holding company’s (BHC) financial conditions. BHCs’ managers possess better knowledge than market investors concerning the likelihood of subsidiary failure, which gives rise to information asymmetry. We examine the effects of this information asymmetry on capital structure adjustments of BHCs in the periods surrounding subsidiary failure. We find that subsidiary failure significantly affects financial policies of the parent companies. Specifically, BHCs increase leverage ratio as early as one year prior to the failure of their subsidiaries, and substantially lower leverage after subsidiary failure. These capital structure adjustments are attributable to BHCs’ internal capital risk and most importantly, the information asymmetry between BHCs and the market.

Keywords: Subsidiary Failure, Capital Structure, Information Asymmetry

JEL Classification: G21, G32

Suggested Citation

Hung, Chi-Hsiou Daniel and Liu, Hong and Wang, Senyu, Capital Structure Adjustments of Bank Holding Companies and Subsidiary Failure (June 21, 2017). Available at SSRN: https://ssrn.com/abstract=3018101 or http://dx.doi.org/10.2139/ssrn.3018101

Chi-Hsiou Daniel Hung (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University of Glasgow
Glasgow, Scotland G12 8QQ
United Kingdom

Hong Liu

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Senyu Wang

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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