Working Paper: CEPR ID: DP17775
Authors: Stephen P. Ferris; Jan Hanousek; Jan Hanousek Jr.; Svatopluk Kapounek
Abstract: This study examines the nature of financial distress for firms within business groups across twenty-five European countries during 2000–2018. We show that business-group membership affects both the likelihood and resolution of financial distress. Whether tunneling or propping of a particular firm occurs depends on the group structure as well as the importance and value of the firm to the group. Our findings show how a firm’s importance within a business group helps to explain how financial distress is resolved. We also observe the long-lasting effects of national legal regimes on how financial distress is resolved within a business group.
Keywords: bankruptcy; financial distress; business groups; ownership; legal origin
JEL Codes: G33; C23; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| defaulting members (G33) | liquidation (G33) |
| business group membership (L20) | successful reorganizations (M54) |
| business group membership (L20) | likelihood of default (G33) |
| importance to the group (D70) | likelihood of default (G33) |
| less important firms (L19) | likelihood of default (G33) |