Creditors’ Rights, Threat of Liquidation, and the Labor and Capital Choices of Firms

Shashwat Alok, Ritam Chaurey and Vasudha Nukala

Journal of Law and Economics, 2022, vol. 65, issue 4, 687 - 714

Abstract: In 2002, India introduced a legal reform that allowed secured creditors to seize and liquidate a defaulter’s assets, thereby strengthening creditors’ rights. We study the impact of the legal change on firms’ real decisions regarding their capital and labor, exploiting variation in their prepolicy proportion of collateralizable assets. We find that firms increased employment and reduced their capital investments. These effects are especially strong for firms in regions with less-efficient courts. Our results are consistent with an increased threat of liquidation for firms following the passage of the law.

Date: 2022
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