Conglomerates and Industry Distress

Gopalan, Radhakrishnan; Xie, Kangzhen

doi:10.2139/ssrn.1107394

Cited by 38 publications

(34 citation statements)

References 38 publications

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“…Several empirical studies support the co-insurance hypothesis: Kim and McConnell (1977) show that merging firms tend to make greater use of debt capital compared to the summed debt volume of the individual firms before the merger, which negates the wealth transfer from bondholders to shareholders. Gopalan and Xie (2011) reveal that in phases of economic distress, conglomerate segments of bank-dependent firms have higher cash flows compared to their matching single-segment firms; for these firms, the diversification discount disappears during economic downturns. Kuppuswamy and Villalonga (2015) analyse the excess value of diversified firms during distressed periods and find that the diversification discount vanishes at the peak of the financial crisis starting in 2007.…”

Section: Debt-holder's View Of Corporate Diversitymentioning

confidence: 98%

The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

Rojahn

Zechser

2017

Accounting & Finance

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This article investigates the impact of corporate diversification on credit risk. To our best knowledge, this is the first paper to use credit default swap (CDS) spreads instead of bond yield or revalued book values to test the risk-reduction hypothesis. The analysis relies upon a sample of STOXX Ò EUROPE 600 index members and covers the years 2010-2014. After controlling for various CDSand firm-specific variables, we find that diversification strategies do not significantly lower CDS premiums. Multilevel mediation analysis further shows that information asymmetries overcompensate the risk-reducing effects resulting from corporate diversification.We are grateful to Karsten Luebke, FOM Hochschule Essen, for his helpful comments and suggestions. We further thank the editors and the anonymous referees for their time, efforts, and valuable comments. We are responsible for any mistakes remaining in this paper.©

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Section: Debt-holder's View Of Corporate Diversitymentioning

confidence: 98%

The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

Rojahn

Zechser

2017

Accounting & Finance

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“…Phillips [2001, 2002] provide empirical evidence on the efficient transfers of resources through asset sales and internal reallocation inside multi-unit firms. More recent empirical literature showed how conglomerates use internal markets to alleviate misallocation and financial constraints during episodes of industry economic distress or financial market distress (Kuppuswamy and Villalonga [2016], Gopalan and Xie [2011], Matvos and Seru [2014]) and presented empirical evidence on the functioning of internal markets in environments with under-developed and distorted external markets (Masulis et al [2011], Natividad [2013). My paper shares with this literature the starting-point idea that multiunit firms (conglomerates or multi-plant firms) run internal markets in which resources might be allocated to the most productive use within the firm more efficiently than through external markets.…”

Section: I(i) Related Literaturementioning

confidence: 99%

Do Multi‐Plant Firms Reduce Misallocation? Evidence from Canadian Manufacturing

Ševčík

2017

The J Industrial Economics

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Using Canadian plant‐level data, this paper shows that, depending on the industry, the differences in the average plant‐level productivity and cross‐plant allocation of resources between multi‐plant and single‐plant firms account for 1 to 15 per cent of the industry‐level TFP. A large part of this contribution stems from more efficient cross‐plant allocation of resources, measured by the covariance between plant size and productivity, in the pool of plants in multi‐plant firms compared to the pool of plants in single‐plant firms. There is less dispersion in the marginal products of the inputs, and thus less misallocation, in industries in which multi‐plant firms account for a larger share of output. The patterns found in the cross‐plant distribution of productivity and size are also consistent with better allocative efficiency among plants in multi‐plant firms than among plants in single‐plant firms.

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“…In line with the literature on investment under uncertainty (Dixit and Pindyck, 1994), we report (specification 1-4) the negative association between firms' financial constraints and their distress probabilities. Further, we examine the influence of business group affiliation (Kornai et al, 2003) and industrial distress (Gopalan and Xie, 2011) in interaction with capital expenditure on firm level bankruptcy probabilities (specification 2-4). Our findings do not support the firms' capital expenditure interaction effect with industry distress and business group affiliation.…”

Section: What Determines¯rm Level Distress Probabilities?mentioning

confidence: 99%

“…Gopalan and Xie (2011) used the similar criteria in identifying firms in distressed industries in US market.9 We deflated the nominal figures using WPI deflator (source: RBI statistics).Corporate Bankruptcy, Soft Budget Constraints, and BG Affiliation1450016-19 Rev. Pac.…”

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confidence: 99%

Corporate Bankruptcy, Soft Budget Constraints, and Business Group Affiliation: Evidence from Indian Firms

Komera

Lukose

2014

Rev. Pac. Basin Finan. Mark. Pol.

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We examine the ex-ante performance of 1185 firms that filed for bankruptcy between 1992 and 2009. Evidence suggests that firm specific poor operating performance and industry wide distress are the principal causes (contributing 42% each for cash flow shortfall) of corporate distress. We observe vitiating investment, operating, and financing performance of the sample firms starting from four years prior to their bankruptcy. Further, we report less severe decline in capital expenditure in the case of state controlled firms and business group affiliated firms, indicating the presence of \soft budget constraints" among the sample firms. Logistic regression, estimating firm level distress probabilities offer indirect evidence for \risk sharing argument" among business group affiliates.

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Conglomerates and Industry Distress

Cited by 38 publications

References 38 publications

The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

Do Multi‐Plant Firms Reduce Misallocation? Evidence from Canadian Manufacturing

Corporate Bankruptcy, Soft Budget Constraints, and Business Group Affiliation: Evidence from Indian Firms

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