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Holding Companies and Debt Financing: A Comparative Analysis Using Option-Adjusted Spreads

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  • Natalia Boliari

    (Department of Economics & Finance, O’Malley School of Business, Manhattan College, Riverdale, NY 10471-4098, USA)

  • Kudret Topyan

    (Department of Economics & Finance, O’Malley School of Business, Manhattan College, Riverdale, NY 10471-4098, USA
    Visiting Professor at Faculty of Economics, Chulalongkorn University, Pathum Wan, Bangkok 10330, Thailand.)

Abstract

This work investigates and compares the total risk attributable to holding and operating companies, using data from the United States. By proxying overall risk by the option-adjusted spread on corporate bonds, we hypothesize that operating companies face a higher risk. Our data were obtained from Bloomberg and comprise 17,800 corporate bonds. Our methodology entails stratified univariate comparisons of the means of the option-adjusted spreads of sub-samples of operating companies versus holding companies. The principal bases of stratification are issue size, bond maturity, and creditworthiness proxied by the Standard and Poor ratings. With very few exceptions, our results report insignificant t-statistics, thus making us unable to reject the null hypothesis that the operating companies have the same business risk as holding companies. When bond rating, maturity, and size are controlled, there is no consistent cost reduction attributable to holding companies, and contrary to common belief, this is more visible for smaller firms. Our work suggests that there is no evidence consistently favoring holding-company financing compared to operating ones.

Suggested Citation

  • Natalia Boliari & Kudret Topyan, 2022. "Holding Companies and Debt Financing: A Comparative Analysis Using Option-Adjusted Spreads," JRFM, MDPI, vol. 15(12), pages 1-18, December.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:12:p:569-:d:990305
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    References listed on IDEAS

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    1. Eduardo A. Cavallo & Patricio Valenzuela, 2010. "The determinants of corporate risk in emerging markets: an option-adjusted spread analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 59-74.
    2. Beverly Hirtle, 2016. "Public disclosure and risk-adjusted performance at bank holding companies," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 151-173.
    3. Andrew Ellul & Vijay Yerramilli, 2013. "Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies," Journal of Finance, American Finance Association, vol. 68(5), pages 1757-1803, October.
    4. Silvia Bressan, 2018. "The funding of subsidiaries equity, double leverage and the risk of bank holding companies," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 45(1-2), pages 209-231, January.
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    Cited by:

    1. Natalia Boliari & Kudret Topyan & Chia-Jane Wang, 2023. "Risk Structure of Banks in Spain: Do BHCs Have Greater Cost of Debt?," Risks, MDPI, vol. 11(10), pages 1-13, October.
    2. Kudret Topyan & Chia-Jane Wang & Natalia Boliari & Carlos Elias, 2024. "Credit Risk Management and US Bank-Holding Companies: An Empirical Investigation," JRFM, MDPI, vol. 17(2), pages 1-11, January.
    3. Dirk Broeders & Marleen de Jonge & David Rijsbergen, 2024. "The European Carbon Bond Premium," Working Papers 798, DNB.

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