Creditor-in-control reform and firms' import of capital goods: Evidence from a quasi-natural experiment

We investigate whether creditors' rights affect firms' import of capital goods. To do so, we exploit India's 2016 Insolvency and Bankruptcy Code (IBC) reform as an exogenous policy shock within a quasi-experimental framework. Using pre-reform cross-sectional variation in mean asset tangibility for identification, our difference-in-differences analysis for the 2011–2020 period shows that affected firms imported more capital goods than control firms in the post-reform period. These results are robust to the inclusion of firm-year covariates, correcting selection bias using entropy balancing, and a placebo test. The effect is driven entirely by firms already engaged in importing (intensive margin), with no impact on non-importers (extensive margin), indicating a key limitation of the IBC. We further find that standalone firms, which lack access to internal capital markets, increased their imports in response to the IBC, while group-affiliated firms did not, suggesting that the IBC primarily operates through easing financing constraints. The effect is stronger for larger, more collateralized firms and weaker for highly leveraged firms, consistent with default risk attenuating the benefits of improved access to credit. Our findings highlight the trade implications of creditor-in-control reforms and underscore the need to address their uneven effects in future legislative endeavours.