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Do Creditor Rights Reduce Tunneling? Evidence From India’s Bankruptcy Law Reforms

Author

Listed:
  • Gautham Udupa

    (Centre for Advanced Financial Research and Learning (CAFRAL))

  • Prasanna Gai

    (University of Auckland)

  • Akshat Singh

    (International Monetary Fund)

  • Asha Sundaram

    (University of Auckland)

Abstract

We study the impact of a bankruptcy reform that improved creditor rights and legal efficiency on the tunnelling of funds through related party transactions within corporate group in India. We exploit a triple difference estimation strategy comparing related party transactions between a ‘treatment’ and ‘control’ group of financially distressed firms, before and after reform, and in Indian states where court systems were less efficient relative to other states. Improved creditor rights reduced tunnelling by inducing borrowers to willingly cut back on bank debt, financial related party transactions, and dividend payouts.

Suggested Citation

  • Gautham Udupa & Prasanna Gai & Akshat Singh & Asha Sundaram, 2025. "Do Creditor Rights Reduce Tunneling? Evidence From India’s Bankruptcy Law Reforms," Working Papers 022259, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022259
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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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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