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Does Debt Overhang Impound Market Discipline: A Study of Bank Risk-taking Using a Natural Experiment

Author

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  • Soumik Bhusan
  • Prasenjit Chakrabarti

Abstract

Starting 2015, the Indian banking regulator conducted clean-up exercise of banks’ balance sheets—aka asset quality review (AQR). This clean-up drive came along with a divergence disclosure, which captures the deviation in asset quality between the regulator and the bank’s assessment. We exploit this natural experiment to tease out the causal impact of divergence disclosure on risk-taking behavior in the presence of two counter-appealing theories: “market discipline†and “debt overhang.†Our results show that divergence disclosures do not discipline banks but rather amplify risk-taking behavior. JEL Codes: G21, E58, G32

Suggested Citation

  • Soumik Bhusan & Prasenjit Chakrabarti, 2025. "Does Debt Overhang Impound Market Discipline: A Study of Bank Risk-taking Using a Natural Experiment," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 24(4), pages 393-414, December.
    • Handle: RePEc:sae:emffin:v:24:y:2025:i:4:p:393-414
    DOI: 10.1177/09726527251338093
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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