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Bankruptcy law and the leverage speed of adjustment

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  • Kumar, Satish

Abstract

We utilize the recently implemented Insolvency and Bankruptcy Code (IBC) in India as a natural experiment to investigate its impact on financially distressed firms in achieving their target leverage. By analyzing a panel of 32,920 firm-year observations from 2004 to 2023 and using a DID framework, we demonstrate that the speed of adjustment (SOA) towards the target leverage is notably higher in distressed firms relative to non-distressed firms in the post-IBC period. This is because the IBC streamlines distressed firms’ debt access and reduces adjustment expenses. To validate this assertion, we show that the IBC's direct impact on leverage is particularly pronounced among distressed firms whose current leverage falls short of their targets. Furthermore, we observe that distressed firms affiliated to business groups experience no significant change in their adjustment towards target leverage in the post-IBC period, attributed to the active internal capital markets within group-affiliated entities.

Suggested Citation

  • Kumar, Satish, 2024. "Bankruptcy law and the leverage speed of adjustment," Finance Research Letters, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:finlet:v:66:y:2024:i:c:s1544612324007037
    DOI: 10.1016/j.frl.2024.105673
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