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Holding Company Discounts and Business Groups Optimal Bailout of Subsidiaries

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  • Fernando Lefort

    ()
    (Facultad de Economía y Empresa, Universidad Diego Portales)

  • Rodrigo Gonzalez

    ()
    (Facultad de Economía y Empresa, Universidad Diego Portales)

Abstract

In this paper, we develop a simple two period model of the holding company-subsidiary relationship that analyzes the option faced by controlling shareholders to optimally bailout subsidiary companies using the holding company’s financial resources. This behavior is rational under several incentive structures originated in the presence of group externalities, synergies and private benefits of control. The results of our model are consistent with recent empirical evidence of holding company discounts, and with the existence of diffuse limits among the affiliated firms of a group. Our results allow us to interpret the presence of holding company discounts as evidence that bailing-out may arise for reasons other, and less conflictive, than the perpetuation of tunneling benefits by the controlling shareholder, such as the perpetuation of benefits of reputation and group synergies.

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Bibliographic Info

Paper provided by Facultad de Economía y Empresa, Universidad Diego Portales in its series Working Papers with number 34.

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Date of creation: Nov 2011
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Handle: RePEc:ptl:wpaper:34

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  2. Gopalan, Radhakrishnan & Nanda, Vikram & Seru, Amit, 2007. "Affiliated firms and financial support: Evidence from Indian business groups," Journal of Financial Economics, Elsevier, vol. 86(3), pages 759-795, December.
  3. Marc Lévy, 2007. "Control in pyramidal structures," DULBEA Working Papers 07-08.RS, ULB -- Universite Libre de Bruxelles.
  4. Isabella Massa & Andreas Billmeier, 2007. "Go Long or Short in Pyramids? News From the Egyptian Stock Market," IMF Working Papers 07/179, International Monetary Fund.
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  11. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
  12. Atanasov, Vladimir & Black, Bernard & Ciccotello, Conrad & Gyoshev, Stanley, 2010. "How does law affect finance? An examination of equity tunneling in Bulgaria," Journal of Financial Economics, Elsevier, vol. 96(1), pages 155-173, April.
  13. Fernando LEFORT & Eduardo WALKER, 2007. "Do Markets Penalize Agency Conflicts Between Controlling And Minority Shareholders? Evidence From Chile," The Developing Economies, Institute of Developing Economies, vol. 45(3), pages 283-314.
  14. Bianco, Magda & Nicodano, Giovanna, 2006. "Pyramidal groups and debt," European Economic Review, Elsevier, vol. 50(4), pages 937-961, May.
  15. Atanasov, Vladimir, 2005. "How much value can blockholders tunnel? Evidence from the Bulgarian mass privatization auctions," Journal of Financial Economics, Elsevier, vol. 76(1), pages 191-234, April.
  16. Fernando Lefort & Eduardo Walker, 2000. "Ownership And Capital Structure Of Chilean Conglomerates:Facts And Hypotheses For Governance," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 3(1), pages 3-27.
  17. Gonenc, Halit & Hermes, Niels, 2008. "Propping: Evidence from new share issues of Turkish business group firms," Journal of Multinational Financial Management, Elsevier, vol. 18(3), pages 261-275, July.
  18. Hellwig, Martin F, 1981. "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 71(1), pages 155-70, March.
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