Regulatory reforms and state supervised corporate bankruptcy reorganization

Abstract

Bankruptcy code is an important determinant of the balance of control between creditors and debtors, during the state-supervised bankruptcy resolution process. In this thesis, across three essays, we study two bankruptcy code reforms: Bankruptcy Abuse Prevention and Consumer Protection Act 2005 (BAPCPA) in the United States, and Insolvency and Bankruptcy Code 2016 (IBC) in India. We demonstrate that BAPCPA and IBC significantly improve creditor protection. Further, using these reforms as exogenous shocks, we examine the effect of increased creditor protection on the state-supervised corporate reorganization process and its outcomes.

The first essay finds mixed evidence for gain in efficiency in Chapter 11, due to increase in creditor protection through BAPCPA. Using cost and screening ability as the efficiency criteria, we find that BAPCPA results in lower bankruptcy cost, as proxied by the Chapter 11 duration. We however, fail to find evidence for improvement in screening ability of Chapter 11, as estimated by the emergence of bankrupt firms from Chapter 11 and their continued survival.

The second essay examines the moderating effect of increased creditor protection on the role of bankruptcy courts as Chapter 11 adjudicating agencies. We find that increased creditor protection in post-BAPCPA period, encourage a race-to-the-top as a result of competition within bankruptcy courts due to forum shopping. The results provide evidence contrary to the stylised fact of relatively efficient reorganization process at Delaware bankruptcy court and the dominant narrative of race-to-the-bottom due to forum shopping.

The third essay is a preliminary examination of the effect of IBC in India, on firm level credit characteristics. For our analysis, we use panel of firm-level data for cost and amount of debt for BSE and NSE listed firms. Our results fail to find evidence of desired effect of improvement in firm credit characteristics with strengthening of creditor rights. Our results however, are in line with the liquidation bias observed by Vig (2013) for the earlier, SARFAESI reform in India.