Funding Contagion through Common Owners

Funding contagion is the impaired ability of a firm to raise external funds when negative shocks hit other firms under the same owner. We study this possibility with pairs of private firms in unrelated industries that share a large common shareholder. We find that a firm’s debt growth and financial leverage go down when the partner firm experiences negative shocks. Our results are consistent with creditors contracting the credit supply because of cash flow cross-pledging between related firms. Funding contagion increases when control rights are strong, and the credit market is less developed.