IDEAS home Printed from https://ideas.repec.org/p/ptl/wpaper/34.html
   My bibliography  Save this paper

Holding Company Discounts and Business Groups Optimal Bailout of Subsidiaries

Author

Listed:
  • Fernando Lefort

    (Facultad de Economía y Empresa, Universidad Diego Portales)

  • Rodrigo Gonzalez

    (Facultad de Economía y Empresa, Universidad Diego Portales)

Abstract

In this paper, we develop a simple two period model of the holding company-subsidiary relationship that analyzes the option faced by controlling shareholders to optimally bailout subsidiary companies using the holding company’s financial resources. This behavior is rational under several incentive structures originated in the presence of group externalities, synergies and private benefits of control. The results of our model are consistent with recent empirical evidence of holding company discounts, and with the existence of diffuse limits among the affiliated firms of a group. Our results allow us to interpret the presence of holding company discounts as evidence that bailing-out may arise for reasons other, and less conflictive, than the perpetuation of tunneling benefits by the controlling shareholder, such as the perpetuation of benefits of reputation and group synergies.

Suggested Citation

  • Fernando Lefort & Rodrigo Gonzalez, 2011. "Holding Company Discounts and Business Groups Optimal Bailout of Subsidiaries," Working Papers 34, Facultad de Economía y Empresa, Universidad Diego Portales.
    • Handle: RePEc:ptl:wpaper:34
    as

    Download full text from publisher

    File URL: http://www.udp.cl/descargas/facultades_carreras/economia/pdf/documentos_investigacion/wp34_Optimal_Bailout_Lefort.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stein, Jeremy C, 1997. "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-133, March.
    2. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    3. Cheung, Yan-Leung & Jing, Lihua & Lu, Tong & Rau, P. Raghavendra & Stouraitis, Aris, 2009. "Tunneling and propping up: An analysis of related party transactions by Chinese listed companies," Pacific-Basin Finance Journal, Elsevier, vol. 17(3), pages 372-393, June.
    4. Bianco, Magda & Nicodano, Giovanna, 2006. "Pyramidal groups and debt," European Economic Review, Elsevier, vol. 50(4), pages 937-961, May.
    5. Raja Kali & Jayati Sarkar, 2005. "Diversification, propping and monitoring: Business groups, firm performance and the Indian economic transition," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2005-006, Indira Gandhi Institute of Development Research, Mumbai, India.
    6. Edwards, Jeremy S.S. & Weichenrieder, Alfons J., 2009. "Control rights, pyramids, and the measurement of ownership concentration," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 489-508, October.
    7. Billmeier, Andreas & Massa, Isabella, 2008. "Go long or short in pyramids? News from the Egyptian stock market," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 949-970, December.
    8. Atanasov, Vladimir & Black, Bernard & Ciccotello, Conrad & Gyoshev, Stanley, 2010. "How does law affect finance? An examination of equity tunneling in Bulgaria," Journal of Financial Economics, Elsevier, vol. 96(1), pages 155-173, April.
    9. Hellwig, Martin F, 1981. "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 71(1), pages 155-170, March.
    10. Lucian Arye Bebchuk, 1999. "A Rent-Protection Theory of Corporate Ownership and Control," NBER Working Papers 7203, National Bureau of Economic Research, Inc.
    11. Friedman, Eric & Johnson, Simon & Mitton, Todd, 2003. "Propping and tunneling," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 732-750, December.
    12. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    13. Heitor V. Almeida & Daniel Wolfenzon, 2006. "A Theory of Pyramidal Ownership and Family Business Groups," Journal of Finance, American Finance Association, vol. 61(6), pages 2637-2680, December.
    14. Riyanto, Yohanes E. & Toolsema, Linda A., 2008. "Tunneling and propping: A justification for pyramidal ownership," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2178-2187, October.
    15. Gonenc, Halit & Hermes, Niels, 2008. "Propping: Evidence from new share issues of Turkish business group firms," Journal of Multinational Financial Management, Elsevier, vol. 18(3), pages 261-275, July.
    16. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 121-148.
    17. Gopalan, Radhakrishnan & Nanda, Vikram & Seru, Amit, 2007. "Affiliated firms and financial support: Evidence from Indian business groups," Journal of Financial Economics, Elsevier, vol. 86(3), pages 759-795, December.
    18. Marc Levy, 2006. "Control in Pyramidal Structures," Working Papers CEB 06-023.RS, ULB -- Universite Libre de Bruxelles.
    19. Jae‐Seung Baek & Jun‐Koo Kang & Inmoo Lee, 2006. "Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols," Journal of Finance, American Finance Association, vol. 61(5), pages 2415-2449, October.
    20. Jang, Hasung & Kang, Hyung Cheol & Park, Kyung Suh, 2005. "The Choice of Group Structure: Divide and Rule," CEI Working Paper Series 2005-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    21. Raja Kali & Jayati Sarkar, 2005. "Diversification, Propping and Monitoring - Business Groups, Firm Performance and the Indian Economic Transition," Finance Working Papers 22357, East Asian Bureau of Economic Research.
    22. Fernando Lefort & Eduardo Walker, 2000. "Ownership And Capital Structure Of Chilean Conglomerates:Facts And Hypotheses For Governance," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 3(1), pages 3-27.
    23. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
    24. Fernando LEFORT & Eduardo WALKER, 2007. "Do Markets Penalize Agency Conflicts Between Controlling And Minority Shareholders? Evidence From Chile," The Developing Economies, Institute of Developing Economies, vol. 45(3), pages 283-314, September.
    25. Atanasov, Vladimir, 2005. "How much value can blockholders tunnel? Evidence from the Bulgarian mass privatization auctions," Journal of Financial Economics, Elsevier, vol. 76(1), pages 191-234, April.
    26. Kee‐Hong Bae & Jun‐Koo Kang & Jin‐Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, vol. 57(6), pages 2695-2740, December.
    27. Randall Morck & Masao Nakamura, 1999. "Banks and Corporate Control in Japan," Journal of Finance, American Finance Association, vol. 54(1), pages 319-339, February.
    28. Ropero Moriones, Eva, 2005. "Limited liability in business groups," DEE - Working Papers. Business Economics. WB wb057617, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Khosa,Amrinder & Ahmed,Kamran & Henry,Darren, 2019. "Ownership Structure, Related Party Transactions, and Firm Valuation," Cambridge Books, Cambridge University Press, number 9781108492195, January.
    2. Sumon Kumar Bhaumik & Andros Gregoriou, 2010. "‘Family’ Ownership, Tunnelling And Earnings Management: A Review Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 705-730, September.
    3. Joseph P. H. Fan & Li Jin & Guojian Zheng, 2016. "Revisiting the Bright and Dark Sides of Capital Flows in Business Groups," Journal of Business Ethics, Springer, vol. 134(4), pages 509-528, April.
    4. Yogesh Maheshwari & Pankaj Gupta, 2019. "Propping in Business Groups: Prediction Efficacy of Earnings Announcements," Global Business Review, International Management Institute, vol. 20(4), pages 981-995, August.
    5. Faccio, Mara & Morck, Randall & Deniz Yavuz, M., 2021. "Business groups and the incorporation of firm-specific shocks into stock prices," Journal of Financial Economics, Elsevier, vol. 139(3), pages 852-871.
    6. Bernard Yeung & Randall Morck & Daniel Wolfenzon, 2004. "Corporate Governance, Economic Entrenchment and Growth," Working Papers 04-21, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Buchuk, David & Larrain, Borja & Muñoz, Francisco & Urzúa I., Francisco, 2014. "The internal capital markets of business groups: Evidence from intra-group loans," Journal of Financial Economics, Elsevier, vol. 112(2), pages 190-212.
    8. Kang, Hyung Cheol & Anderson, Robert M. & Eom, Kyong Shik & Kang, Sang Koo, 2017. "Controlling shareholders' value, long-run firm value and short-term performance," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 340-353.
    9. Anaïs Hamelin-Schertzer, 2010. "Is there tunneling in Small Business Groups? Evidence from French SMEs," Working Papers CEB 10-003.RS, ULB -- Universite Libre de Bruxelles.
    10. Torres, Juan Pablo & Jara Bertín, Mauricio & López-Iturriaga, Félix J., 2017. "Corporate control and firm value: The bright side of business groups," Journal of Family Business Strategy, Elsevier, vol. 8(2), pages 99-108.
    11. Jara, Mauricio & López-Iturriaga, Félix J. & Torres, Juan Pablo, 2021. "Firm value and pyramidal structures: New evidence for family firms," Journal of Business Research, Elsevier, vol. 127(C), pages 399-412.
    12. Heitor Almeida & Daniel Wolfenzon, 2005. "A Theory of Pyramidal Ownership and Family Business Groups," NBER Working Papers 11368, National Bureau of Economic Research, Inc.
    13. Cheung, Yan-Leung & Qi, Yuehua & Raghavendra Rau, P. & Stouraitis, Aris, 2009. "Buy high, sell low: How listed firms price asset transfers in related party transactions," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 914-924, May.
    14. Sviatoslav Moskalev & Seung Park, 2010. "South Korean Chaebols and Value-Based Management," Journal of Business Ethics, Springer, vol. 92(1), pages 49-62, March.
    15. Basu, Debarati & Sen, Kaustav, 2015. "Financial decisions by business groups in India: Is it “fair and square”?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(2), pages 121-137.
    16. Ljungqvist, Alexander & Chen, Donghua & Lu, Haitian & Jiang, Dequan & Zhou, Mingming, 2015. "State Capitalism vs. Private Enterprise," CEPR Discussion Papers 10423, C.E.P.R. Discussion Papers.
    17. Viswanathan Nagarajan & Pitabas Mohanty & Apalak Khatua, 2023. "Financing effects of corporate diversification: A review," Review of Managerial Science, Springer, vol. 17(7), pages 2555-2585, October.
    18. Bany-Ariffin, A.N. & Mat Nor, Fauzias & McGowan Jr., Carl B., 2010. "Pyramidal structure, firm capital structure exploitation and ultimate owners' dominance," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 151-164, June.
    19. Byun, Hae-Young & Choi, Sunhwa & Hwang, Lee-Seok & Kim, Robert G., 2013. "Business group affiliation, ownership structure, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 311-331.
    20. Della Piana, Bice & Vecchi, Alessandra & Cacia, Claudia, 2012. "Towards a better understanding of Family Business Groups and their key dimensions," Journal of Family Business Strategy, Elsevier, vol. 3(3), pages 174-192.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ptl:wpaper:34. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Enrique Calfucura (email available below). General contact details of provider: https://edirc.repec.org/data/feudpcl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.