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

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.