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Does Bankruptcy Law Improve the Fate of Distressed Firms? The Role of Credit Channels

Bose, Udichibarna and Filomeni, Stefano and Mallick, Sushanta (2020) 'Does Bankruptcy Law Improve the Fate of Distressed Firms? The Role of Credit Channels.' Journal of Corporate Finance. ISSN 0929-1199

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Abstract

Growing financial failure at firm-level can have serious consequences for banks in terms of rising non-performing assets, in the absence of a strong bankruptcy system. Such a scenario in India made its dysfunctional insolvency system to be reformed, introducing the new Insolvency and Bankruptcy Code (IBC) in 2016. Using a panel of 33,845 Indian firms over the period of 2008-2019 and by employing a difference-in-differences approach, we investigate how the IBC has supported financially distressed firms in mitigating their intrinsic vulnerability during the post-IBC period, compared to their non-distressed counterparts. We find that through an expanded credit availability and a lower cost of debt financing during the post-IBC period, distressed firms are able to improve their performance relative to non-distressed firms. Furthermore, we provide evidence that the benefits stemming from the implementation of the IBC policy are more prominent for those financially distressed firms that are larger, younger and more collateralized. Our results are robust to a battery of tests and identification strategies. Our conclusions are relevant in contributing to the current academic and policy debates on safeguarding and preserving business performance and continuity under stressed scenarios.

Item Type: Article
Uncontrolled Keywords: Bankruptcy law, Firm performance, Debt structure, Distressed firms, Cost of Debt
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 12 Jan 2021 16:30
Last Modified: 11 Mar 2021 09:04
URI: http://repository.essex.ac.uk/id/eprint/29518

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