Corporate failure prediction modeling: Distorted by business groups' internal capital markets?.

Most models in the bankruptcy prediction literature implicitly assume companies are stand-alone entities. However, in view of the importance of business groups in Continental Europe, ignoring group ties may have a negative impact on predictive reliability. We find that the quality of information contained in the accounting ratios typically used as bankruptcy predictors (liquidity, leverage, performance, size and efficiency) is not the same for group member companies as compared to stand-alone firms. Combining company and group level data substantially increases fit and classification performance. Our results are consistent with existing theoretical and empirical findings from the internal capital markets literature.Accounting; Bankruptcy; Bankruptcy prediction; Business groups; Classification; Companies; Data; Efficiency; Factors; Firms; Impact; Information; Internal capital markets; Market; Markets; Model; Models; Performance; Quality; Ratios; Reliability; Research; Size;

Legal reform and aggregate small and micro business bankruptcy rates: Evidence from the 1997 Belgian Bankruptcy Code.

Bankruptcy; Business;

Filtering speed in a continental European reorganization procedure.

Recent studies of U.S. Chapter 11 show it to be a relatively efficient procedure. We examine reorganization cases in a Continental European, creditor-oriented bankruptcy system, viz. Belgium, and report very different findings. Using hazard and cure regression models to determine what drives the length of time spent in reorganizations, we find evidence suggesting that courts have little impact on the screening and filtering process. In fact, virtually all drivers of procedure length prove to have the opposite sign of what one would expect if the procedure would efficiently realise its goals. Instead, the procedure appears to be mainly creditor driven.Reorganization; Bankruptcy; Hazard models; Filtering speed;

Internal capital markets and capital structure: Bank versus internal debt.

Recent empirical evidence has shown that internal capital markets within multinational corporations are used to reduce overall financing costs by optimizing the mix of internal and external debt of affiliates in different countries. We show that this cost saving use of internal capital markets is not limited to multinationals, but that domestic business groups actively optimize the internal/external debt mix across their subsidiaries as well. We use both subsidiary and group level financial statement data to model the bank and internal debt concentration of Belgian private business group affiliates and show that a pecking order of internal debt over bank debt at subsidiary level leads to a substantially lower bank debt concentration for group affiliates as compared to stand-alone companies. However, as the group's overall debt level mounts, groups increasingly locate bank borrowing in subsidiaries with low costs of external financing (i.e. large subsidiaries with important collateralable assets) to limit moral hazard and dissipative costs.Internal capital markets; Capital structure; Debt source concentration; Ownership structure; Bank debt;

Capital structure dynamics in private business groups.

Dynamic models of capital structure assume that companies trade-off the advantages of a leverage adjustment and its costs. In general, private companies are assumed to face large adjustment costs, and should have lower financing flexibility. However, we argue that an important class of private companies – business group affiliates – may face relatively low adjustment costs because of their access to both internal and external capital markets. Our empirical results show significant differences in the composition of the capital structure and the leverage adjustment process between affiliates of private Belgian business groups and comparable stand-alone companies.

The impact of exporting on SME capital structure and debt maturity choices. National Bank of Belgium Working Paper No. 311

Using a longitudinal dataset comprising of detailed financial and exporting data from Belgian small and medium-sized enterprises (SME) between 1998 and 2013, this article examines the manner in which firms manage to finance their export activities and the resulting impact on corporate capital structure. We find that exporters have to finance relatively more working capital as compared to their non-exporting peers and that they resolve this financing need by carrying more short-term debt. In addition, we evidence that the relationship between pledgeable short-term assets, such as working capital, and short-term debt financing is more pronounced for exporters. In particular, we show that the ties between pledgeable short-term assets and short-term debt financing are stronger for export- intensive firms and firms that serve distant and risky export destinations. Overall, what our empirical findings seem to suggest is that developing tools that facilitate the pledging of assets is likely to boost SME export activities by widening access to bank financing and reducing financial constraints

Cash holdings and business group membership ☆

This study examines the cash policies of business group members (i.e., affiliates). Using a panel dataset of private Belgian affiliates and comparable non-affiliated firms, the empirical results show that business group affiliates hold significantly smaller amounts of cash as compared to non-affiliated firms. This finding is consistent with the notion that affiliates can afford to keep lower cash reserves because these firms can access the internal capital market of the group. The analysis also combines affiliate level and group level data to evaluate cash drivers and shows that groups in financial distress reduce cash holdings in affiliates. However, affiliates that are more important for the group's reputation and operations maintain cash levels comparable to affiliates belonging to financially healthy groups

Debt Recovery in Firm Liquidations: Do Liquidation Trustees Matter?

Insolvency systems play a crucial role in protection of creditor rights, yet micro-level empirical evidence on the functioning of insolvency regimes worldwide is sparse. We investigate whether creditors’ recovery of outstanding claims, a measure of ex-post efficiency of an insolvency regime, depends on the characteristics of the trustee delegated the administration of the liquidation proceedings. To this end, we draw on a novel dataset of firm liquidations from Slovenia and exploit courts’ de facto random assignment of firm liquidation cases to licensed liquidation trustees. Using a wide range of specifications and controls, we find that a subset of trustee characteristics indeed matters for debt recovery. Thus, ex-post efficiency of an insolvency regime depends not only on its formal rules and procedures, but also on who implements them in practice