Bankruptcy law, creditors’ rights, and cash holdings: Evidence from a quasi-natural experiment in India

Abstract

In this study, we examined the impact of change in creditors’ rights on corporate cash holdings. By using the bankruptcy code implemented in India in 2015 as a quasi-natural experimental setting, we compared the changes in excess cash in the control and treatment groups during the pre- and post-regulation periods. Our analysis revealed that the treatment firms responded to the change in creditors’ rights by decreasing their excess cash, whereas no change was observed in the control firms. This finding confirms the substitution effect that exists between external debt finance and internal cash in financing firm investments.