Group affiliation and default prediction

• Main Authors: Beaver, W.H (Author), Cascino, S. (Author), Correia, M. (Author), McNichols, M.F (Author)
• Format: Article
• Language: English
• Published: INFORMS Inst.for Operations Res.and the Management Sciences 2019
• Subjects: Business groups; Consolidation; Credit ratings; Credit spread; Credit spreads; Default prediction; Finance; Financial distress; Financial reporting; Financial reporting transparency; Financial statements; Forecasting; Off-balance sheets; Predictive power; Transparency
• Online Access: View Fulltext in Publisher

 Using a large sample of business groups frommore than 100 countries around the world, we showthat group informationmatters for parent and subsidiary default prediction. Group firms may support each other when in financial distress. Potential group support represents an off-balance sheet asset for the receiving firm and an off-balance sheet liability for the firm offering support. We find that subsidiary information improves parent default prediction over and above group-level consolidated information possibly because intragroup exposures are netted out upon consolidation.Moreover, we document that improvements in parent default prediction decrease in the extent of parent-country financial reporting transparency, a finding that suggests that within-group information matters most when consolidated financial statements are expected to be of lower quality. We also show that parent and other group-firms' default risk exhibits predictive power for subsidiary default. Lastly, we find that within-group information explains cross-sectional variation in CDS spreads. Taken together, our findings contribute to the prior literature on default prediction and have direct relevance to investors, credit-rating agencies, and accounting regulators. © 2019 INFORMS.