Corporate Bankruptcy and Creditor Incentives

Abstract:     
The bankruptcy process around the world can involve long delays that erode firm value and raise the cost of capital. These inefficiencies are likely to be greater in uncompetitive, government-dominated financial markets where creditors lack the incentive to monitor borrowers and recover assets. Using a unique dataset on corporate bankruptcy filings in India, we analyze the effects of bank entry deregulation on bankruptcy outcomes. Exploiting geographic variation in bank entry following deregulation, we find that private bank entry in a region is associated with an increase in frivolous filings by firms that are not financially distressed, but seek a stay on assets to escape increased creditor scrutiny. We also observe a decrease in delays in the bankruptcy process and fewer liquidations, which take longer to resolve. In regions with stronger creditor rights, foreign bank entry is also associated with more bankruptcy filings. These findings suggest that the ownership and competitiveness of the banking sector can significantly affect bankruptcy outcomes.

Number of Pages in PDF File: 45

Keywords: Bankruptcy, creditor rights, bank competition, government-ownership

JEL Classification: G21, G23, G28, G38

working papers series