Corporate Failure Prediction Modeling: Distorted by Business Groups' Internal Capital Markets?

Dewaelheyns, Nico; Hulle, Cynthia Van

doi:10.1111/j.1468-5957.2006.00009.x

Cited by 58 publications

(38 citation statements)

References 36 publications

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“…This is consistent with the existence of comfort letters, which motivated Boot et al (1993) model, and which is still in force, according to Standard & Poor's reports (Samson, 2001) and rating agencies evaluations. It is also consistent with the evidence in Dewaelheyns and Van Hulle (2006), who report that "private business groups support struggling subsidiaries [..]. However, once groups pro…tability turns negative, groups tend to terminate support to weak subsidiaries".…”

Section: Groupssupporting

confidence: 88%

“…12 The resulting face value of debt for the subsidiary is higher than that of two stand alone companies (219 versus 114.4). This characteristic of the optimal solution is consistent with the empirical evidence in Dewaelheyns and Van Hulle (2006), who notice that the "decreased potential costs of …nancial distress allow group members to ex ante take on more debt, thus realizing more tax gains". It is a fortiori consistent with the very high leverage observed in project …nancing, LBOs and private equity, which are closer to our assumption of no agency costs.…”

Section: Group Versus Stand Alonesupporting

confidence: 84%

“…They all recognize that group membership a¤ects the size, location and default risk of members'debt obligations (Emery and Cantor, 2005;Dewaelheyns and Van Hulle, 2006;Bianco and Nicodano, 2006). As a whole, cross subsidization seems to exist, but to be conditional on survival of the parent.…”

Section: Introductionmentioning

confidence: 99%

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Ownership Links, Leverage and Credit Risk

Luciano

Nicodano

2008

SSRN Journal

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This paper explores the relationship between optimal leverage and credit risk under ownership links. It develops a structural model of a parent and a subsidiary, which issues debt in its own name under a guarantee by the parent. We …nd that zero leverage can be optimal for the guarantor, while leverage close to one can be optimal for the guaranteed company, as this optimally exploits the tax shield of debt while minimizing default costs. As far as credit risk is considered, their joint default probability is lower than that of stand alone units, despite their higher debt capacity. Higher group optimal leverage and lower default probability increase value with respect to conglomerate mergers and stand alone arrangements. Default probability, spreads and loss given default of the subsidiary are higher than for a stand alone with similar size and volatility.We also study the situation when the subsidiary is constrained to a debt equal to the optimal stand alone level. Only in this case group credit risk depends on the ownership share.Consistently with intuition, our unconstrained model rationalizes the capital structure typical of private equity; the constrained model instead is able to explain observed features of public business groups and more regulated environments.

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Section: Groupssupporting

confidence: 88%

Section: Group Versus Stand Alonesupporting

confidence: 84%

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Ownership Links, Leverage and Credit Risk

Luciano

Nicodano

2008

SSRN Journal

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“…These authors blame weak corporate governance for their findings, but it may be possible that the nature of group structure contributed to the findings. Dewaelheyns and Van Hulle's (2006) finding that member firms belonging to the business group's core business is more strongly supported than others insinuates the importance of considering the overall group structure as well as individual firms.…”

Section: Related Diversification and Intensifying Densitymentioning

confidence: 96%

“…However, for top managers of a business group member firm, it may be more difficult to justify an entry into an industry that is not closely related to the firm's existing industry portfolio especially when the business group is of a substantial size, because ample group-level resources may provide the firm with a buffer against shortterm jolts (Dewaelheyns & Van Hulle, 2006). Moreover, the employment risk of managers of business group member firms may be less sensitive to industry-specific shocks than that of managers of stand-alone firms because the controlling shareholders may regard a member firm's contribution to the entire group more important than its short-term fluctuations in performance (Kato, Kim, & Lee, 2007).…”

Section: Related Diversification and Intensifying Densitymentioning

confidence: 99%

A tale of two levels: the diversification of business groups

Huh

Eden²

2016

AMPROC

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Firm exit after distress: differentiating between bankruptcy, voluntary liquidation and M&A

et al. 2011

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This paper examines firm-level determinants of mature firm exits after economic distress. Using nested logit models and a sample of 6,118 distress-related exits in Belgium, we analyze the type of exit that distressed firms experience. We show that 41% of the firms in our sample exit through a court driven exit procedure (mainly bankruptcy), 44% are voluntarily liquidated and 14% are acquired, merged or split (hereafter M&A). Distressed firm exit follows two distinct stages. First, a firm either decides to exit voluntarily or is forced into bankruptcy, which is the least efficient exit strategy. Compared to bankruptcy, the probability of a voluntary exit increases with higher levels of cash, lower leverage, holding no secured debt and being embedded in a group. If a firm exits voluntarily, it enters a second stage and decides either to exit through voluntary liquidation or through a M&A. Conditional on not going bankrupt, the likelihood of voluntary liquidation compared to M&A increases with higher levels of cash or secured debt, with smaller size and with an absence of group relations. We contribute to the firm exit literature by jointly analyzing three exit types and showing that bankruptcy and voluntary liquidation are fundamentally different exit routes. While voluntary liquidation is an important exit route for distressed firms, most previous studies have failed to distinguish between bankruptcy and liquidation. We hence contribute to the exit literature by showing that bankruptcy, voluntary liquidation and M&A are fundamentally distinct exit routes for distressed firms, driven by different firm level characteristics and following a two-stage process

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Corporate Failure Prediction Modeling: Distorted by Business Groups' Internal Capital Markets?

Cited by 58 publications

References 36 publications

Ownership Links, Leverage and Credit Risk

Ownership Links, Leverage and Credit Risk

A tale of two levels: the diversification of business groups

Firm exit after distress: differentiating between bankruptcy, voluntary liquidation and M&A

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