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Testing the impact of liquidation speed on leverage using Indian data

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  • Banerjee, Biswajit
  • Herrala, Risto

Abstract

The paper investigates the influence of the speed of liquidation of insolvent firms on leverage. The theoretical model presented formalizes the intuitive view that an increase in liquidation speed is expected to decrease average leverage as highly leveraged firms exit. Analysis of Indian data, however, suggests that an increase in liquidation speed increases average leverage. This finding is linked to influential observations at the right tail of the leverage distribution. We propose an asset-weighted variant of the proposition that holds with empirical data.

Suggested Citation

  • Banerjee, Biswajit & Herrala, Risto, 2024. "Testing the impact of liquidation speed on leverage using Indian data," BOFIT Discussion Papers 6/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:294826
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    Cited by:

    1. Banerjee, Biswajit & Herrala, Risto, 2025. "An agency cost channel from creditor rights reforms to leverage," BOFIT Discussion Papers 6/2025, Bank of Finland Institute for Emerging Economies (BOFIT).

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    Keywords

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    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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