Parent-only Balance Sheet Information and Credit Risk Assessments

Accounting Horizons. Forthcoming

38 Pages Posted: 18 Feb 2021 Last revised: 21 Oct 2023

See all articles by Jenny Wu Tucker

Jenny Wu Tucker

University of Florida - Warrington College of Business

Ying Zhou

University of Connecticut

Jigao Zhu

University of International Business and Economics

Date Written: September 6, 2023

Abstract

General-purpose financial statements prepared under GAAP are for a consolidated reporting entity—a collection of legal entities that include the parent and any subsidiaries it controls. This reporting model results in a loss of information about the individual legal entities within the consolidated reporting entity. Our study examines the role of parent-only balance sheet information in assessing the credit risk of the parent when it is a bank holding company. We obtain evidence from three trading platforms: credit default swaps (CDS), outstanding bonds, and new bonds. We find that parent-only leverage is useful for debtholders to assess the parent’s credit risk even after considering consolidated leverage. Moreover, in the CDS markets, parent-only leverage is more useful for firms without downstream guarantee than firms with guarantee and is less useful for firms with a stronger internal capital market. Our study raises the awareness of parent-only financial information for credit risk assessments.

Keywords: Consolidation; parent-only; credit risk; debt; banks; disaggregation.

JEL Classification: M2, M4, and G3.

Suggested Citation

Tucker, Jenny Wu and Zhou, Ying and Zhu, Jigao, Parent-only Balance Sheet Information and Credit Risk Assessments (September 6, 2023). Accounting Horizons. Forthcoming, Available at SSRN: https://ssrn.com/abstract=3781689 or http://dx.doi.org/10.2139/ssrn.3781689

Jenny Wu Tucker (Contact Author)

University of Florida - Warrington College of Business ( email )

Gainesville, FL 32611
United States
352-273-0214 (Phone)
352-392-7962 (Fax)

Ying Zhou

University of Connecticut ( email )

2100 hillside road
Storrs, CT 06084
United States
3528708674 (Phone)

Jigao Zhu

University of International Business and Economics ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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