Default risk in business groups
This paper analyzes how combining firms into either groups or conglomerates affects their credit standing, as measured by their de- fault probabilities, recovery rates and credit spreads. Each combina- tion offers protection against default to its affiliates, and issues debt to optimize the trade-off between tax gains and default costs. In a group, the probability of joint default turns out to be lower than that of both stand-alone firms and conglomerates. This is the bright side of credit risk in groups. The dark side is that affiliation depletes the credit worthiness of the subsidiary. Such results hold irrespective of cash- ow correlation, if affiliates are equal in size, but fade if the parent is larger.
|Date of creation:||2012|
|Contact details of provider:|| Postal: Via Real Collegio, 30, 10024 Moncalieri (To)|
Web page: http://www.carloalberto.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tykvová, Tereza & Borell, Mariela, 2012.
"Do private equity owners increase risk of financial distress and bankruptcy?,"
Journal of Corporate Finance,
Elsevier, vol. 18(1), pages 138-150.
- Tykvová, Tereza & Borell, Mariela, 2011. "Do private equity owners increase risk of financial distress and bankruptcy?," ZEW Discussion Papers 11-076, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Michael C. Jensen, 1991. "Corporate Control And The Politics Of Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 13-34.
When requesting a correction, please mention this item's handle: RePEc:cca:wpaper:283. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giovanni Bert)
If references are entirely missing, you can add them using this form.