Bankruptcy Reform and Tax Avoidance: Quasi-Experimental Evidence From India

Abstract

Considering the enactment of a pro-creditor bankruptcy reform in India as an exogenous policy shock, we investigate its impact on firms' tendency to avoid taxes. Employing the difference-in-differences (DiD) methodology, we find that post-bankruptcy reform, distressed firms significantly reduced their tax avoidance than non-distressed firms. Our channel analysis shows that increased borrowings, along with higher return on equity (RoE) and sales growth, help distressed firms reduce tax avoidance as opposed to non-distressed firms during the post-IBC period. The reduction in tax avoidance is due to improved credit culture after the said reform. Furthermore, our findings remain qualitatively similar under DiD with matching technique and the randomization inference test.