Pyramidal Groups and Debt

Posted: 6 May 2006

See all articles by Magda Bianco

Magda Bianco

Bank of Italy

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; EGCI; Netspar


This paper suggests that debt should be raised by subsidiaries in order to exploit the limited liability of the holding company. However, when this behavior increases the cost of funds, the holding might prefer to raise debt to a point where it would also default when subsidiaries are insolvent.

After accounting for standard controls, we find that holding companies in Italian pyramids have higher leverage than subsidiaries and that the cash flow share of the entrepreneur in the subsidiary does not play a significant role. These findings are consistent with the implications of our model of group capital structure.

Suggested Citation

Bianco, Magda and Nicodano, Giovanna, Pyramidal Groups and Debt. European Economic Review, Forthcoming, Available at SSRN:

Magda Bianco (Contact Author)

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Giovanna Nicodano

University of Turin - Department ESOMAS ( email )

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