Bankruptcy law, creditors’ rights, and cash holdings: Evidence from a quasi-natural experiment in India

Jadiyappa, Nemiraja; Shrivastav, Santosh Kumar

doi:10.1016/j.frl.2021.102261

Cited by 2 publications

(8 citation statements)

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“…Introducing bankruptcy reforms protects the business from default and ensures creditors' rights during financial distress (Rodano et al, 2016). When there is a weak legal structure for creditors' right to recover their assets, corporations easily ignore or give much less weight to bankruptcy risk as a financial choice (Jadiyappa & Shrivastav, 2022).…”

Section: Bankruptcy Reforms: Indian Ibc Framework (2016)mentioning

confidence: 99%

“…In the era before the implementation of the IBC, politically connected firms maintained larger cash reserves in their books, which could potentially contribute to increased agency conflicts (Boubakri et al, 2013). However, in the period following the implementation of the IBC, connected firms have adjusted and reduced the amount of cash held in their books, prioritizing protecting creditors' rights (Jadiyappa & Shrivastav, 2022). Therefore, examining IBC (2016) on the cash-holding and investment behavior of politically connected firms may bring new insights into the emerging market.…”

Section: Bankruptcy Reforms: Indian Ibc Framework (2016)mentioning

confidence: 99%

“…Similarly, in recent studies, Ganguly et al (2023a) posit that in India, investment cash flow sensitivities for politically connected firms are lower in comparison to nonconnected firms. Furthermore, Jadiyappa and Shrivastav (2022) postulate that bankruptcy reforms in India strengthen creditors' rights, and hence firms cannot access external capital abruptly from banks and other financial institutions. Our current study examines the impact of bankruptcy reforms on investment cash flow sensitivities for politically connected firms.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

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Does Bankruptcy Reforms Enhance Firm Performances for Politically Connected Firms? Evidence from India

Ganguly,

Mishra

2023

Journal of Emerging Market Finance

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Using a sample of 1,953 listed firms on the National Stock Exchange from 2009 to 2021, we investigate whether politically connected firms alter their cash holding patterns following the Insolvency and Bankruptcy Code (IBC) reforms introduced in 2016. We also examine the impact of changes in a firm’s cash holdings on its performance. Results show that politically connected firms reduced their cash holdings following the implementation of IBC in 2016, as new reforms better protected creditors through strict enforcement rights. We also find that politically connected firms with large amounts of cash perform poorly in the post-IBC period compared to their nonconnected peers. The results are robust after excluding the COVID-19 period and controlling for firm size, leverage, and business group affiliations. JEL Codes: G32; G34; G38

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Section: Bankruptcy Reforms: Indian Ibc Framework (2016)mentioning

confidence: 99%

Section: Bankruptcy Reforms: Indian Ibc Framework (2016)mentioning

confidence: 99%

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

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Does Bankruptcy Reforms Enhance Firm Performances for Politically Connected Firms? Evidence from India

Ganguly,

Mishra

2023

Journal of Emerging Market Finance

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“…The second stream examines, in the Indian context, the impact of bankruptcy laws on various firm-level decisions. For example, Vig (2013) examines the SARFESI Act on secured credit, Bose et al (2021) examine the impact of IBC on the cost of financing, Jose et al (2020) and Singh et al (2021) examine the impact of IBC on the financial policy and Jadiyappa and Shrivastav (2021) examine the impact of IBC on the cash policy of a firm. We extend this line of research by examining the impact of IBC on the dividend policy.…”

Section: Introductionmentioning

confidence: 99%

“…(2020) and Singh et al. (2021) examine the impact of IBC on the financial policy and Jadiyappa and Shrivastav (2021) examine the impact of IBC on the cash policy of a firm. We extend this line of research by examining the impact of IBC on the dividend policy.…”

Section: Introductionmentioning

confidence: 99%

Bankruptcy law, creditors' rights and dividend policy: evidence from a quasi-natural experiment

Jadiyappa

Kakani²

2023

IJMF

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PurposeThe purpose of this paper is to examine how changes in creditors' rights affect the dividend policy behavior of corporate firms.Design/methodology/approachThe authors use the implementation of the bankruptcy and insolvency code (IBC) in India in 2016 as a quasi-natural experiment setup. Differential application of this law allows them to use the Difference in Differences approach to extract the marginal impact of change in creditors' rights on the dividend policy.FindingsThe authors show that firms responded to strengthening creditors' rights by decreasing their dividend payout. Further, the authors observe that this negative response is conditioned on firm leverage and the nature of the creditor, i.e. public or private. The firms with a greater leverage ratio and a greater proportion of private debt in the total debt in the pre-event period have shown greater response to the change in the law. Lastly, the authors show that stock markets positively respond to the observed decrease in dividends only when a corresponding decrease in the leverage accompanies such a decrease.Originality/valueThe authors contribute to the finance and law literature from several aspects. First, the authors extend this stream by bringing to light the dividend policy response of firms when they are subjected to a change in creditors' rights. Second, the authors also show how firm-level factors like financial policy and the nature of the creditor condition their response to IBC. Lastly, the authors also examine the market reaction to the dividend policy response of firms to the change in bankruptcy law.

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Bankruptcy law, creditors’ rights, and cash holdings: Evidence from a quasi-natural experiment in India

Cited by 2 publications

References 15 publications

Does Bankruptcy Reforms Enhance Firm Performances for Politically Connected Firms? Evidence from India

Does Bankruptcy Reforms Enhance Firm Performances for Politically Connected Firms? Evidence from India

Bankruptcy law, creditors' rights and dividend policy: evidence from a quasi-natural experiment

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