Strategic Default and Tunneling by Firms: An Empirical Investigation

48 Pages Posted: 19 Dec 2019

See all articles by Harshini Shanker

Harshini Shanker

Indian School of Business (ISB), Hyderabad

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Vaidya Nathan K

affiliation not provided to SSRN

Date Written: December 3, 2019

Abstract

Strategic default by firms remains a global concern. Although the theoretical literature studies this phenomenon, empirical evidence is scant as data categorizing defaults as strategic or distress-driven is unavailable. We use unique data from India to investigate how firms that strategically default on their debt differ ex-ante in their behavior from distress-driven defaulters. We find that strategic defaulters tunnel cash by making large loans to related parties and these loans are significant ex-ante predictors of strategic default as against distress default. Strategic defaulters make these loans despite their own need for external financing. Further, these loans carry lower rates of interest and are repaid over significantly longer periods than loans made by distress defaulters and non-defaulters. Thus, the magnitude and contractual features of related party loans contain information on the giver’s intent to strategically default on external debt.

Keywords: strategic default, tunneling, bankruptcy, related party transactions, business groups

JEL Classification: G33

Suggested Citation

Shanker, Harshini and Subramanian, Krishnamurthy and K, Vaidya Nathan, Strategic Default and Tunneling by Firms: An Empirical Investigation (December 3, 2019). Indian School of Business. Available at SSRN: https://ssrn.com/abstract=3497487 or http://dx.doi.org/10.2139/ssrn.3497487

Harshini Shanker (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Vaidya Nathan K

affiliation not provided to SSRN

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