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Parent-subsidiary dispersion, cost of debt and debt default: Evidence from China

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  • Li, Bin
  • Liang, Yilan
  • Shahab, Yasir
  • Gull, Ammar Ali
  • Ashraf, Naeem

Abstract

This paper examines whether parent-subsidiary dispersion affects the cost of debt. Prior literature is silent on the relationship between firms' locations and debt cost in the unique setting of the Chinese credit market. Using a comprehensive dataset of Chinese A-share listed firms during 2003–2019, we find that geographical and institutional dispersion between parent companies and their subsidiaries are positively associated with debt cost. This effect is more pronounced for firms: (a) with fewer government subsidies, (b) without political connections and (c) with male CEOs/chairman. However, this effect is not significant for (i) firms cross-listed on B or H share and (ii) for firm-level observations during the implementation of the 4 trillion stimulus package. Lastly, while testing for plausible channels, we find that parent-subsidiary dispersion can increase the debt default by raising debt cost. Overall, these findings provide new evidence on how a firm's geographical dispersion can determine debt financing costs.

Suggested Citation

  • Li, Bin & Liang, Yilan & Shahab, Yasir & Gull, Ammar Ali & Ashraf, Naeem, 2022. "Parent-subsidiary dispersion, cost of debt and debt default: Evidence from China," Economic Modelling, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:ecmode:v:107:y:2022:i:c:s0264999321003047
    DOI: 10.1016/j.econmod.2021.105715
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    More about this item

    Keywords

    Parent-subsidiary dispersion; Cost of debt; Debt default; China;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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