Bankruptcy in Business Groups


Speaker:Maria Correia, London Business School
Date: Wednesday 12 November 2014
Time: 14:00
Location: Constantine Leventis

Further details

We examine bankruptcy in business groups. Using Orbis data, we show that group structure matters for bankruptcy prediction at both the parent and subsidiary level. Bankruptcy prediction for the parent improves by incorporating subsidiary level- probability of bankruptcy information, even if the parent’s consolidated financial statements are used. Similarly, a subsidiary bankruptcy prediction model that incorporates the probability of bankruptcy of the parent (and of other subsidiaries in the same group) exhibits higher predictive power.

The association between parent and subsidiary bankruptcy is stronger if they are integrated (i.e., the parent has higher percentage of ownership in the subsidiary, an interlocked board, operates in the same industry, shares the same name, and has a material investment in the subsidiary). We further document that the higher reported association is due, in part, to increased tunnelling and propping.