ABSTRACT
In this study, we examined the impact of changes in creditors’ rights on the financial policy of Indian firms in a quasi-natural experimental set up. Using the implementation of Insolvency and Bankruptcy Code (IBC) in 2016 as an exogenous policy shock, we investigated the changes in quantitative (leverage) and qualitative (debt maturity and debt heterogeneity) aspects of the financial policy. Overall, our findings indicated that the strengthening of creditors’ rights had a negative impact on debt ratio and debt heterogeneity and a positive impact on long-term debt maturity structure. These results were observed mainly in those firms that had a high probability of bankruptcy in the pre-implementation period.
Disclosure of interest
No potential conflict of interest was reported by the author(s).
Notes
1 The IBC stipulates a time-bound procedure to resolve bankruptcy, i.e. 180 days, with a possible extension of 90 more days. Moreover, the management of the assets would be transferred to a resolution authority pending the resolution.
2 To confirm the presence of long-term trend in our data, we regressed our dependent variables against a time-trend variable. The coefficient of the trend variable in all the three regressions was statistically significant, which confirms the existence of a long-term trend in our data.
3 We were constrained to use the difference in the differences approach in our framework for want of a suitable control group since IBC is applicable to all the firms