Does Regulatory Forbearance On Bank Loans Adversely Impact Governance of Borrowing Firms?: The Indian Experience

We ask whether regulatory forbearance on bank loans contributes to deterioration in the governance of borrowing firms. More exposed firms experience a reduction in board independence and external monitoring, an increase in management compensation including transactions with connected entities, an increase in board similarity and CEO duality, and a change in auditors. Their exposure to less value-adding unrelated projects, which show a higher tendency to stall, increases. Thus, the ability of the borrowing firms’ management to benefit from forbearance increases its influence within the firm and loosens governance controls. Consequently, competition and entry at the industry level decline.