Credit Advantage and Firm Structure: The Benefits of a Separate Corporate Veil

34 Pages Posted: 15 Mar 2011 Last revised: 14 Mar 2012

See all articles by Andriy Bodnaruk

Andriy Bodnaruk

University of Illinois at Chicago

Massimo Massa

INSEAD - Finance

Lei Zhang

City University of Hong Kong (CityU)

Date Written: March 13, 2012

Abstract

We relate the firm legal structure to the degree of credit advantage of the headquarters. We argue that subsidiary-based firms are born as the outcome of a process of agglomeration around firms with better credit advantage. Therefore, subsidiary based firms have better credit advantage than no-subsidiary firms. At the moment of agglomeration (M&A) we document a significant positive relation between the difference in credit advantage between the bidder and the target and the probability of choosing the target, the value created in the M&A, and the likelihood that the target will be retained as a subsidiary. The better the credit advantage of the HQ compared to the subsidiaries, the higher is the percentage of the total financing that takes place at HQ level.

Keywords: separate legal liability, subsidiary based firm, credit advantage, agglomeration, M&As

JEL Classification: G32, G34, L22, L25

Suggested Citation

Bodnaruk, Andriy and Massa, Massimo and Zhang, Lei, Credit Advantage and Firm Structure: The Benefits of a Separate Corporate Veil (March 13, 2012). Available at SSRN: https://ssrn.com/abstract=1786218 or http://dx.doi.org/10.2139/ssrn.1786218

Andriy Bodnaruk

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Lei Zhang

City University of Hong Kong (CityU) ( email )

College of Business
83 Tat Chee Avenue
Hong Kong
China

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