Corporate Pyramide Effects in the Creation and Resolution of Financial Distress

This study examines the nature of financial distress within business groups across 25 European countries during 2000-2018. We discover that business group membership is positively associated with a greater likelihood of default. Group membership reduces the likelihood of reorganization, with liquidation or acquisition more common. Deeper business groups are less likely to have distressed members, but such firms are most often liquidated or acquired. Lower-level firms within a business group are more likely to be liquidated. Our findings are consistent with agency theory, asset tunneling, and a cash flow-voting rights imbalance.