Promoter Ownership and Bankruptcy Reforms: Evidence from India

Abstract

Purpose – The ‘demand side’ view of creditor rights’ posit a negative association between creditor rights and corporate borrowings. We examine whether the ‘demand side’ effect is more pronounced amongst firms with excess promoter holdings. Subsequently, we analyze the impact of excess promoter holdings on investment decisions owing to bankruptcy reforms.

Design/methodology/approach- To analyze the above question, we exploit the passage of the Insolvency and Bankruptcy Code, 2016 (IBC) that strengthens the creditor rights of lenders, which affects the borrowing decisions of Indian corporates. Employing a panel of listed Indian firms over the period of 2012-2019, we analyze how the IBC affects firms' borrowing decisions with excess promoter holdings.

Findings- We find that bankruptcy reforms led to a statistically significant decline in the use of borrowed funds (primarily secured and long-term debt) by firms with excess concentrated holdings. Our analysis also indicates that firms with excess promoter ownership face increasing debt costs due to bankruptcy reforms. As a result, firms with excess promoter holdings cut their investments. Overall, our results indicate that India's bankruptcy reforms significantly affect the firms' financing and investment decisions with concentrated ownership.

Originality/value- While past research has explored the relationship between bankruptcy reforms and demand for/supply of debt, we provide novel empirical evidence on the role of promoter holdings that affects the relationship between bankruptcy law and financing and investment decisions. To the best of our knowledge, we are the first to investigate the role of ownership structure in the context of bankruptcy reforms by using a quasi-natural experiment.

Keywords: Creditor rights, Bankruptcy reforms, Ownership structure, Financing, and investment decisions