Bankruptcy Law And Equity Capital: Evidence From India

We study the impact of a creditor-in-control bankruptcy regime in India on equity capital particularly on outside equity, which refers to investment by noncontrolling shareholders. We exploit the distance of lenders from the bankruptcy courts for identification. The inflow of both inside and outside equity capital increases significantly and cost reduces as a result of the bankruptcy law. A significant reduction in tunneling of resources by the insiders seems to be the channel at work. An increase in equity is also accompanied by an increase in debt at a lower cost. Firms use the additional capital to increase investment.