Access to Internal Capital, Creditor Rights, and Corporate Borrowing: Does Group Affiliation Matter?

64 Pages Posted: 15 Apr 2020 Last revised: 10 Feb 2021

See all articles by Chandra Thapa

Chandra Thapa

University of Strathclyde

Sandeep Rao

Dublin City University Business School

Hisham Farag

University of Birmingham - Birmingham Business School

Santosh Koirala

University of Birmingham, Birmingham Business School

Date Written: February 23, 2020

Abstract

We examine whether the effect of increased creditor rights on corporate borrowing depends on firm's access to internal capital. By exploiting a creditor protection reform in India, empirical outcomes strongly indicate that strengthening of creditor rights leads to increased corporate borrowing among firms that have constrained access to internal capital compared to business group affiliated firms, which have relatively easier access to internal capital. Further, the increased corporate borrowing by firms with constrained access to internal capital, in the post-reform period, is associated with a greater expansion of real investments, improved operational performance, and better market valuation. Taken together, these findings indicate that expanding creditor rights may aid in improving allocative efficiency.

Keywords: Creditor protection, Internal capital, Capital Structure, Leverage, Business groups, Corporate borrowing, Firm performance

JEL Classification: G32, G34, G38

Suggested Citation

Thapa, Chandra and Rao, Sandeep and Farag, Hisham and Koirala, Santosh, Access to Internal Capital, Creditor Rights, and Corporate Borrowing: Does Group Affiliation Matter? (February 23, 2020). Thapa, C., Rao, S., Farag, H., & Koirala, S. (2020). Access to internal capital, creditor rights and corporate borrowing: Does group affiliation matter?. Journal of Corporate Finance, 101585. Doi 10.1016/j.jcorpfin.2020.101585, Available at SSRN: https://ssrn.com/abstract=3559220

Chandra Thapa

University of Strathclyde ( email )

16 Richmond Street
Glasgow 1XQ, Scotland G1 1XQ
United Kingdom

HOME PAGE: http://https://www.strath.ac.uk/staff/thapachandradr/

Sandeep Rao (Contact Author)

Dublin City University Business School ( email )

Dublin 9
Ireland

Hisham Farag

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Santosh Koirala

University of Birmingham, Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

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