Incentives for being in business group: by yield spread and bond rating changes

Abstract

This paper measures hidden benefit that firms take by being in included in the business group and observe markets perception of it. Hidden benefit is measured by the difference between real yield spread and predicted yield spread of each bond issued by firms in large business groups. Perception of a market is assessed by the market reaction to bond rating change events. This paper finds that there exists hidden benefit which cannot be detected by explicit factors of bonds, firms and market among firms in large business groups. The market perceives the fact and reacts accordingly, as it shows significantly negative reaction after downgrades of bond ratings for bonds issued by firms without hidden benefit but not for those by firms with it.