Organizational form and access to capital: The role of regulatory interventions

We examine how regulatory nudges mandating only disclosure of ownership information and no structural change impact a firm’s access to capital based on its organizational form. As a first of its kind, Clause 35 in India (characterized by weak enforcement and concentrated ownership) only required classifying shareholders into insiders and outsiders. Pre-regulation, group-affiliated firms exhibited lesser financial constraints than standalone firms. This reverses post-regulation, especially for group firms with higher insider ownership. More so for those with weaker compensating mechanisms or poorer future performance. In essence, regulation exclusively requiring information disclosure has been effective in reallocating capital more efficiently to firms with fewer agency problems.