Do creditor rights reduce tunneling? Evidence from India’s bankruptcy law reforms

Abstract

We study the impact of a bankruptcy reform that improved creditor rights and legal efficiency on the tunneling of funds through related party transactions within corporate group in India. We exploit a triple difference estimation strategy comparing related party transactions between a ‘treatment’ and ‘control’ group of financially distressed firms, before and after reform, and in Indian states where court systems were less efficient relative to other states. Improved creditor rights reduced tunneling by inducing borrowers to reduce financial related party transactions, which resulted in voluntary deleveraging of bank debt.