Holding Companies and Debt Financing: A Comparative Analysis Using Option-Adjusted Spreads

Abstract

This work investigates and compares the total risk attributable to holding and operating companies, using data from the United States. By proxying overall risk by the option-adjusted spread on corporate bonds, we hypothesize that operating companies face a higher risk. Our data were obtained from Bloomberg and comprise 17,800 corporate bonds. Our methodology entails stratified univariate comparisons of the means of the option-adjusted spreads of sub-samples of operating companies versus holding companies. The principal bases of stratification are issue size, bond maturity, and creditworthiness proxied by the Standard and Poor ratings. With very few exceptions, our results report insignificant t-statistics, thus making us unable to reject the null hypothesis that the operating companies have the same business risk as holding companies. When bond rating, maturity, and size are controlled, there is no consistent cost reduction attributable to holding companies, and contrary to common belief, this is more visible for smaller firms. Our work suggests that there is no evidence consistently favoring holding-company financing compared to operating ones.

Credit Risk Management and US Bank-Holding Companies: An Empirical Investigation

“…Similarly, if we move down to BBB+ bonds, we have 187 such bonds in the corresponding cell, with an average OAS value of 109 basis points. In an earlier study, due to the unavailability of individual OAS values of all the bonds evaluated, Boliari and Topyan (2022) used an alternative procedure and tested if the mean differences in the OAS values of comparable cells were statistically significant. Their work showed that the differences in means were statistically significant, but they could not measure the economic significance.…”

“…Similarly, the Dodd-Frank Act requires the BHC to serve as a "source of strength" for any subsidiary. Boliari and Topyan (2022) highlighted the drawbacks of holding companies' inevitable involvement in business policy decisions with limited familiarity. In conclusion, our literature review suggests that the net effect of forming a BHC on credit financing is uncertain.…”

Risk Structure of Banks in Spain: Do BHCs Have Greater Cost of Debt?

“…They explain that BHCs should have a higher cost of debt due to their higher leverage compared to operating bonks. As underlined by Boliari and Topyan (2022), there are serious drawbacks with holding companies that may be overseeing and making major policy decisions for businesses or industries that they are not particularly familiar with. Additionally, as reported by Brandao-Marques et al (2020), restricting banks' range of activities ameliorates the link between government support and bank risk taking as this affects the banks' willingness to take risk and has an impact on the cost of capital of BHCs.…”