Bankruptcy Law Reform and Its Impact on Firms’ Borrowing: A South Asian Experience

Abstract

With the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, India reformed and unified its fragmented insolvency frameworks into a single comprehensive law designed to prioritize asset maximization and ensure time-bound resolutions. Through a quasi-experimental setting, we examine the impact of the IBC reform on the corporate borrowings of publicly listed Indian firms against comparable companies in the neighboring South Asia countries (Pakistan, Sri Lanka and Bangladesh). With a panel dataset of Indian and non-Indian firms from 2011–2020, we observe an increase in firms’ overall borrowing in India, along with lowered borrowing costs. The results from our difference-in-differences cross-country setting were also shown to be robust through a placebo test. We report that it was not only financially distressed firms that particularly benefited from the reform. In fact, Indian companies with relatively low leverage and high growth harnessed access to more credit at lower costs even more than their counterparts. Our results highlight the boost of the overall credit supply at the country level as a result of improved bankruptcy laws