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Pyramidal Groups and Debt

Posted: 6 May 2006  

Magda Bianco

Bank of Italy

Giovanna Nicodano

University of Turin - Department of Economics and Statistics; Collegio Carlo Alberto

Abstract

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: https://ssrn.com/abstract=733183

Magda Bianco (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giovanna Nicodano

University of Turin - Department of Economics and Statistics ( email )

Turin, 10134
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/nicodano/

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy
390116705006 (Phone)

HOME PAGE: http://www.carloalberto.org/people/nicodano/

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