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Holding Company Discounts and Business Groups Optimal Bailout of Subsidiaries

Author

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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.

Suggested Citation

  • Fernando Lefort & Rodrigo Gonzalez, 2011. "Holding Company Discounts and Business Groups Optimal Bailout of Subsidiaries," Working Papers 34, Facultad de Economía y Empresa, Universidad Diego Portales.
    • Handle: RePEc:ptl:wpaper:34
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