Bankruptcy in Indian context: perspectives from corporate governance

Sunaina Kanojia () and Shasta Gupta ()
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Sunaina Kanojia: University of Delhi
Shasta Gupta: University of Delhi

Journal of Management & Governance, 2023, vol. 27, issue 2, No 5, 505-545

Abstract: Abstract The purpose of this study is to gauge the efficacy of theories of corporate governance in alleviating bankruptcy in the Indian context. The study uses logistic regression and Cox proportional hazard model on a sample of 680 firm observations. Two-stage least squares regression is employed to mitigate endogeneity issues. Main results support agency theory in terms of CEO non-duality, low CEO compensation, and concentrated ownership variables, and defend resource dependence theory with respect to large board size and high directors’ attendance, for precluding bankruptcy. Internal and external governance mechanisms are more favourable in 5 to 3 years and 1 to 2 years prior to bankruptcy, respectively. The predictive power of governance models is found to be better than of financial models in 5 to 4 years prior to bankruptcy. Combined models involving both governance and financial variables outperform standalone governance or financial models and are most accurate in the fifth year preceding bankruptcy. Additional tests show that the time availability of independent directors holds more importance over their resourcefulness in the initial years of distress. This study has a few key takeaways for stakeholders, companies, and regulating bodies. It is suggested that regulators enforce CEO non-duality and necessitate a minimum number of board meetings to be attended per year by the directors. This is one of the first studies to develop a corporate governance model on bankruptcy in the Indian context since the enactment of its new bankruptcy code.

Keywords: Agency theory; Bankruptcy; CEO duality; Corporate governance; India; Resource dependence theory (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10997-022-09630-z

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