Do Debt Contract Enforcement Costs Affect Financing and Asset Structure?

Review of Financial Studies, Forthcoming

AFA 2015 Boston Meetings Paper

57 Pages Posted: 9 Dec 2012 Last revised: 15 Dec 2015

See all articles by Radhakrishnan Gopalan

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Abhiroop Mukherjee

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Manpreet Singh

Georgia Institute of Technology

Date Written: December 14, 2015

Abstract

Using the staggered introduction of fast-track debt recovery courts in India, we estimate the causal effect of a reduction in debt contract enforcement costs on financing and asset maturity. A reduction in enforcement costs is associated with an increase in long-term debt and a decrease in short-term debt and trade-credit. The increase in debt maturity is confined to firms that borrow from multiple lenders, have abnormally short debt maturity structures before the reform, and to smaller firms. Firms also reduce the number of banking relationships, and increase the proportion of long-term assets after the reform. Our results highlight an important causal effect of debt contract enforcement costs on firm financing and investment.

Keywords: Legal Enforcement Costs, Debt Contracts, Trade Credit, Asset Structure

JEL Classification: F34, G32, G33, G38, K42

Suggested Citation

Gopalan, Radhakrishnan and Mukherjee, Abhiroop and Singh, Manpreet, Do Debt Contract Enforcement Costs Affect Financing and Asset Structure? (December 14, 2015). Review of Financial Studies, Forthcoming , AFA 2015 Boston Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2186835 or http://dx.doi.org/10.2139/ssrn.2186835

Radhakrishnan Gopalan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Abhiroop Mukherjee

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Manpreet Singh

Georgia Institute of Technology ( email )

800 W Peachtree St NW
Room 4162
Atlanta, GA 30308
United States
+14043855330 (Phone)

HOME PAGE: http://www.manpreets.com

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