Creditor Rights, Threat of Liquidation, and Labor-Capital Choice of Firms

In 2002, India introduced a legal reform that allowed secured creditors to seize and liquidate the defaulter’s assets, thereby strengthening creditor rights. We study the impact of the legal change on firms’ real decisions regarding their capital and labor, exploiting variation in their pre-policy proportion of collateralizable assets. We find that firms increased employment and reduced their capital investments. These effects are especially stronger for firms in regions with less-efficient courts. Our results are consistent with an increased threat of liquidation for firms following the passage of the law.

Keywords: Labor and Finance, Creditor Rights, Employment, Labor-Capital Choice, Labor Intensity, SARFAESI

JEL Classification: G28, G32, G33, J23, K22

Suggested Citation: Suggested Citation

Alok, Shashwat and Chaurey, Ritam and Nukala, Vasudha, Creditor Rights, Threat of Liquidation, and Labor-Capital Choice of Firms (December 1, 2018). Journal of Law and Economics, Forthcoming, Indian School of Business, Available at SSRN: https://ssrn.com/abstract=3316630 or http://dx.doi.org/10.2139/ssrn.3316630