Regulatory Protection and Opportunistic Bankruptcy

54 Pages Posted: 16 Oct 2015 Last revised: 18 Aug 2022

See all articles by Radhakrishnan Gopalan

Radhakrishnan Gopalan

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

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Kandarp Srinivasan

Northeastern University - D’Amore-McKim School of Business

Date Written: June 1, 2016

Abstract

We document controlling shareholder (insider) opportunism in an insolvency regime that uses an accounting rule to determine bankruptcy eligibility. Using unique data on bankrupt firms from an emerging market, we show insiders intentionally manage earnings downward to understate firm net worth so as to be able to file for bankruptcy. Downward pre-bankruptcy earnings management is associated with more payments to insiders and weaker performance, post-filing. A battery of tests suggests our results cannot be fully explained as an artifact of financial distress. Rather, they are consistent with insiders exploiting weak investor protection to extract private benefits at the expense of lenders and outside shareholders. Our study serves as a cautionary tale for all insolvency regimes that use a balance sheet test in an environment with weak creditor protection.

Keywords: bankruptcy, emerging markets, regulation, accruals, accounting rules, tunneling

JEL Classification: G33, M41

Suggested Citation

Gopalan, Radhakrishnan and Martin, Xiumin and Srinivasan, Kandarp, Regulatory Protection and Opportunistic Bankruptcy (June 1, 2016). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2674272 or http://dx.doi.org/10.2139/ssrn.2674272

Radhakrishnan Gopalan

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

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

Xiumin Martin (Contact Author)

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Kandarp Srinivasan

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
377
Abstract Views
2,707
rank
116,477
PlumX Metrics