Debt, mergers and acquisitions, institutional arrangements and change to the multilayered subsidiary form

Abstract

Despite the rapid increase in corporate debt and prevalence of mergers and acquisitions, researchers have not examined whether these changes have affected corporate form change. The purpose of this research is to examine causes of change from the multidivisional (MDF) to the multilayered subsidiary form (MLSF). The MLSF is a corporation with a hierarchy of two or more levels of subsidiary corporations with a parent company at the top of the hierarchy operating as a management company. Using logistic regression analysis, we examine causes of change to the MLSF in the largest 100 U.S. industrial corporations. Although corporations organized some of their assets as subsidiaries throughout the twentieth century, corporations began to organize more of their assets as subsidiaries in response to capital accumulation constraints (e.g., rising debt, increasing competition) in the early 1980s. Continued economic constraints resulted in corporate political behavior in the mid-1980s that produced changes in state business policy. These policy changes provided a political-legal structure for tax-free corporate restructuring of divisions as subsidiary corporations. Change in state business policy also provided a means for corporations to merge, acquire, and spin off subsidiary corporations tax-free. The results show that corporations' with more mergers and acquisitions, more long-term debt, liability-prone product lines, and declining dividends are significantly more likely to change from the MDF to the MLSF. The analysis supports capital dependence theory. The MLSF creates internal capital markets, reduces corporations' dependence on external capital markets, and enhances their financial and organizational flexibility.