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Debt maturity, creditor rights, and capital allocation efficiency: Evidence from quasi-natural experiments in India

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  • Sahoo, Jyoti Ranjan
  • Mishra, Ajay Kumar

Abstract

This study investigates the impact of India’s Insolvency and Bankruptcy Code (IBC) on capital allocation efficiency among firms with higher long-term debt maturity. Using a difference-in-differences framework on a panel of listed firms from 2010 to 2021, the analysis examines how strengthened creditor rights under the IBC have influenced firms’ investment behavior, particularly those with greater long-term debt exposure. The results show that the implementation of the IBC significantly enhanced capital allocation efficiency by mitigating both underinvestment and overinvestment. Overall, the results suggest that the reform improved firms’ financial decision-making and contributed to greater capital market stability in India. The results remain robust across alternative model specifications and controls for firm, industry, and time-specific effects.

Suggested Citation

  • Sahoo, Jyoti Ranjan & Mishra, Ajay Kumar, 2025. "Debt maturity, creditor rights, and capital allocation efficiency: Evidence from quasi-natural experiments in India," Journal of Financial Stability, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finsta:v:81:y:2025:i:c:s1572308925001093
    DOI: 10.1016/j.jfs.2025.101480
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    Keywords

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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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