Financial restructuring of firms under weak bankruptcy laws - an Indian experience
by Smita Mazumdar; Anupam Rastogi
Afro-Asian J. of Finance and Accounting (AAJFA), Vol. 11, No. 4, 2021

Abstract: This paper empirically investigates behaviour of firms with respect to capital utilisation under a weak insolvency and bankruptcy law using Indian corporate data over a period of 2000-2014. It suggests that firms resorted to higher borrowings after being subjected to restructuring under the corporate debt restructuring mechanism - an informal arrangement supported by the Reserve Bank of India. While firms managed to obtain more debt from lenders thereby signalling the possibility of recovery, we do not find any improvement in firm profitability post financial restructuring. This indicates that lenders in countries with weak insolvency regime postpone the day of reckoning. The empirical evidence corroborates the theory of agency cost of debt and the signalling hypothesis in the change in capital structure of firms.

Online publication date: Thu, 23-Sep-2021

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