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Bankruptcy reform and corporate risk-taking: Evidence from a quasi-natural experiment

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  • Singh, Ranjeet
  • Chauhan, Yogesh
  • Jadiyappa, Nemiraja

Abstract

Using the initiation of bankruptcy reforms in India, we assess the causal effect of the bankruptcy reform on corporate risk-taking. We observe that the reform that balances the rights of creditors and debtors enables distressed firms to increase their corporate risk-taking than non-distressed firms. We next show that an increase in corporate risk-taking increases the operating performance of distressed firms, compared with non-distressed firms. These results indicate that the bankruptcy reform that favors safe viable businesses instead of forcing distressed firms to inefficient liquidation alters firms’ incentives to take the risk.

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  • Singh, Ranjeet & Chauhan, Yogesh & Jadiyappa, Nemiraja, 2022. "Bankruptcy reform and corporate risk-taking: Evidence from a quasi-natural experiment," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000083
    DOI: 10.1016/j.frl.2022.102679
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    1. Tian, Guangning & Li, Bo & Cheng, Yue, 2022. "Does digital transformation matter for corporate risk-taking?," Finance Research Letters, Elsevier, vol. 49(C).

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