Access to Collateral and Corporate Debt Structure: Evidence from a Natural Experiment

Abstract:     
We investigate how firms respond to strengthening of creditor rights by examining their financial decisions following a securitization reform in India. We find that the reform led to a reduction in secured debt, total debt, debt maturity, asset growth and an increase in liquidity hoarding by firms. Moreover, the effects are more pronounced for firms that have a higher proportion of tangible assets, since these firms are more affected by the secured transactions law. These results suggest that strengthening of creditor rights introduces a liquidation bias and documents how firms alter their debt structures to contract around it.

Number of Pages in PDF File: 71

Keywords: Capital Structure, Bankuptcy, Law and Finance, Debt structure, Financial development, Creditor rights

JEL Classification: F34, F37, G21, G28, G33, K39

working papers series