Quiet life no more? Corporate bankruptcy and bank competition
Todd A. Gormley
University of Pennsylvania - The Wharton School
Indiana University - Kelley School of Business - Department of Finance
Indiana University - Kelley School of Business - Department of Business Economics & Public Policy
March 14, 2014
Bankruptcy procedures around the world involve long delays that erode firm value and raise the cost of capital (Djankov, et al., 2008). These inefficiencies are likely to be greater in an uncompetitive banking sector, where creditors lack the incentive to undertake the costly effort required to recover assets from delinquent borrowers. Using a unique dataset on the population of corporate bankruptcy filings in India, we analyze whether entry deregulation in the banking sector affects creditors’ incentives to pursue delinquent firms. Exploiting district-level variation in the entry of new private banks, we find that bank entry is associated with an increase in filings by firms seeking a stay on assets to escape increased repayment pressure from creditors. This increase in filings is more pronounced in regions with stronger creditor rights. Bank entry is also associated with a significant decline in the duration of bankruptcy proceedings and a shift towards workouts rather than liquidations. The results are consistent with creditors exerting greater effort to pursue delinquent firms and to resolve bankruptcies more quickly following deregulation.
Number of Pages in PDF File: 47
Keywords: Bankruptcy, creditor rights, bank competition, managerial incentives
JEL Classification: G21, G23, G28, G38working papers series
Date posted: March 19, 2010 ; Last revised: May 12, 2014
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