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Financial restructuring of firms under weak bankruptcy laws - an Indian experience

Author

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  • Smita Mazumdar
  • Anupam Rastogi

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.

Suggested Citation

  • Smita Mazumdar & Anupam Rastogi, 2021. "Financial restructuring of firms under weak bankruptcy laws - an Indian experience," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 11(4), pages 518-536.
    • Handle: RePEc:ids:afasfa:v:11:y:2021:i:4:p:518-536
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