Access to internal capital, creditor rights and corporate borrowing: does group affiliation matter?

Chandra Thapa, Sandeep Keshava Rao, Hisham Farag, Santosh Koirala

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    46 Downloads (Pure)

    Abstract

    We examine whether the effect of increased creditor rights on corporate borrowing depends on firms’ access to internal capital. By exploiting a creditor protection reform in the emerging market of India, empirical outcomes strongly indicate that strengthening of creditor rights leads to increased corporate borrowing among firms that have constrained access to internal capital compared to business group affiliated firms, which have relatively easier access to internal capital. Further, the increased corporate borrowing by firms with constrained access to internal capital, in the post-reform period, is associated with a greater expansion of real investments, improved operational performance, and better market valuation. Taken together, these findings indicate that expanding creditor rights may aid in improving allocative efficiency.
    Original languageEnglish
    Article number101585
    Pages (from-to)1-25
    Number of pages25
    JournalJournal of Corporate Finance
    Volume62
    Early online date27 Jan 2020
    DOIs
    Publication statusPublished - Jun 2020

    Keywords

    • creditor protection
    • internal capital
    • standalone firms
    • business group firms
    • corporate borrowing
    • firm performance

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