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Creditor rights and innovation: evidence from a quasi-natural experiment

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  • Srivastava, Aaraadhya

Abstract

In 2016, the Government of India (GoI) implemented the Insolvency and Bankruptcy Code (IBC), a reform aimed at enhancing creditor rights by enabling creditors to swiftly ‘seize’ and ‘liquidate’ a defaulter’s assets within a defined timeframe. This reform was designed to strengthen creditor protections in India. Our study examines the impact of this reform on firm-level innovation. We hypothesize that creditor-friendly reforms improve access to debt capital, thereby encouraging firms to intensify their innovation activities. Utilizing an entropy-balanced difference-in-differences (Entropy-DiD) approach and leveraging pre-reform variation in firms’ ‘proportion of debt’ for identification, we find that firms with a lower pre-reform ‘proportion of debt’ increased their R&D investment by 29.4 % more than firms with a higher pre-reform ‘proportion of debt’ in the post-IBC period. Supporting our baseline result, we further document that this effect is stronger among more profitable firms within the ‘treated’ group. Our findings are robust to firm-level time-varying control variables, fixed effects for firm and industry by year, and a placebo test using a fictitious IBC promulgation year. These results indicate that stronger creditor rights foster an environment conducive to risk-taking, encouraging firms to pursue ventures that, while risky, hold significant potential for profitability. Consequently, our research highlights the welfare implications of creditor-friendly bankruptcy reforms, providing insights that could inform future policy decisions.

Suggested Citation

  • Srivastava, Aaraadhya, 2025. "Creditor rights and innovation: evidence from a quasi-natural experiment," Journal of Contemporary Accounting and Economics, Elsevier, vol. 21(3).
    • Handle: RePEc:eee:jocaae:v:21:y:2025:i:3:s1815566925000438
    DOI: 10.1016/j.jcae.2025.100496
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    Keywords

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    JEL classification:

    • 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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