Weak Creditor Rights and Insider Opportunism: Evidence from an Emerging Market

62 Pages Posted: 28 Jul 2017 Last revised: 26 Oct 2017

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: August 4, 2017

Abstract

We document insider opportunism in an insolvency regime that is characterized by weak creditor rights and uses an accounting rule to determine bankruptcy eligibility. Using a unique dataset of bankrupt firms from India, we show insiders manage earnings downward before filing for bankruptcy via inventory and trade receivable accruals. A battery of robustness tests confirm accrual behavior is not merely driven by poor performance. Downward earnings management before bankruptcy filing is associated with more payment transactions to insiders post-bankruptcy. Low pre-bankruptcy accruals are associated with poor post-filing performance as well as greater loss of market value on bankruptcy announcement. Our results are consistent with insiders gaming the accounting-based entry rule to obtain bankruptcy protection and extracting private benefits from bankrupt firms. Our study highlights the importance of strong creditor rights for generating positive economic outcomes (La Porta et al. (1997)).

Suggested Citation

Gopalan, Radhakrishnan and Martin, Xiumin and Srinivasan, Kandarp, Weak Creditor Rights and Insider Opportunism: Evidence from an Emerging Market (August 4, 2017). Northeastern U. D’Amore-McKim School of Business Research Paper No. 3010001; 28th Annual Conference on Financial Economics and Accounting. Available at SSRN: https://ssrn.com/abstract=3010001 or http://dx.doi.org/10.2139/ssrn.3010001

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

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