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The “Cinderella†effect in business groups: Choosing Which Subsidiary is the Princess

Author

Listed:
  • Jan Hanousek, Jr.

    (Fogelman College of Business Economics, University of Memphis, United States)

  • Mark J. Flannery

    (Department of Finance, University of Florida, United States)

  • Stephen P. Ferris

    (Ryan College of Business, University of North Texas, United States)

  • Jan Hanousek

    (Department of Department of Finance and Accounting, Faculty of Business and Economics, Mendel University in Brno, Czech Republic; CEPR, London, United Kingdom)

  • Svatopluk Kapounek

    (Department of Finance and Accounting, Faculty of Business and Economics, Mendel University in Brno, Czech Republic)

Abstract

This study examines the nature of financial distress for firms within business groups distributed across twenty-five European countries from 2000 to 2018. We show that business group membership and a firm’s importance within the group explain both the incidence and resolution of financial distress. We find that critical subsidiaries have a negligible chance of default and bankruptcy. Less critical firms, however, are more likely to default and liquidate. It suggests that the future resolution of financial distress could be decided during the group formation and the subsidiary's positioning. We also show the persistent effect of national legal regimes.

Suggested Citation

  • Jan Hanousek, Jr. & Mark J. Flannery & Stephen P. Ferris & Jan Hanousek & Svatopluk Kapounek, 2025. "The “Cinderella†effect in business groups: Choosing Which Subsidiary is the Princess," MENDELU Working Papers in Business and Economics 2025-102, Mendel University in Brno, Faculty of Business and Economics.
    • Handle: RePEc:men:wpaper:102_2025
    as

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    References listed on IDEAS

    as
    1. Almamy, Jeehan & Aston, John & Ngwa, Leonard N., 2016. "An evaluation of Altman's Z-score using cash flow ratio to predict corporate failure amid the recent financial crisis: Evidence from the UK," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 278-285.
    2. Holmes, R. Michael & Hoskisson, Robert E. & Kim, Hicheon & Wan, William P. & Holcomb, Tim R., 2018. "International strategy and business groups: A review and future research agenda," Journal of World Business, Elsevier, vol. 53(2), pages 134-150.
    3. Edward I. Altman, 2018. "Applications of Distress Prediction Models: What Have We Learned After 50 Years from the Z-Score Models?," IJFS, MDPI, vol. 6(3), pages 1-15, August.
    4. Strebulaev, Ilya A. & Yang, Baozhong, 2013. "The mystery of zero-leverage firms," Journal of Financial Economics, Elsevier, vol. 109(1), pages 1-23.
    5. Alberto Abadie & Guido W. Imbens, 2006. "Large Sample Properties of Matching Estimators for Average Treatment Effects," Econometrica, Econometric Society, vol. 74(1), pages 235-267, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bankruptcy; financial distress; business groups; ownership; legal origin;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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