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Corporate Bankruptcy, Soft Budget Constraints, and Business Group Affiliation: Evidence from Indian Firms

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  • Surenderrao Komera

    (Institute for Financial Management and Research, 24, Kothari road, Nungambakkam, Chennai – 600 034, Tamilnadu, India)

  • Jijo Lukose P. J.

    (Indian Institute of Management Trichy, Tiruchirapalli – 620 015, Tamilnadu, India)

Abstract

We examine theex-anteperformance of 1185 firms that filed for bankruptcy between 1992 and 2009. Evidence suggests that firm specific poor operating performance and industry wide distress are the principal causes (contributing 42% each for cash flow shortfall) of corporate distress. We observe vitiating investment, operating, and financing performance of the sample firms starting from four years prior to their bankruptcy. Further, we report less severe decline in capital expenditure in the case of state controlled firms and business group affiliated firms, indicating the presence of "soft budget constraints" among the sample firms. Logistic regression, estimating firm level distress probabilities offer indirect evidence for "risk sharing argument" among business group affiliates.

Suggested Citation

  • Surenderrao Komera & Jijo Lukose P. J., 2014. "Corporate Bankruptcy, Soft Budget Constraints, and Business Group Affiliation: Evidence from Indian Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(03), pages 1-28.
    • Handle: RePEc:wsi:rpbfmp:v:17:y:2014:i:03:n:s0219091514500167
    DOI: 10.1142/S0219091514500167
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    References listed on IDEAS

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    1. Dani Rodrik & Arvind Subramanian, 2005. "From "Hindu Growth" to Productivity Surge: The Mystery of the Indian Growth Transition," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 193-228, September.
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    Cited by:

    1. Surenderrao Komera & P. J. Jijo Lukose, 2016. "Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-26, September.

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    More about this item

    Keywords

    Corporate distress; soft budget constraints; business groups; JEL Classifications: G32; JEL Classifications: G33; JEL Classifications: G34; JEL Classifications: L25;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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