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|
|Date of revision:|
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- 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.
- 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.
- Michael C. Jensen, 1991. "Corporate Control And The Politics Of Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 13-34.
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