Dividend policy adjustments under bankruptcy law: Insights from distressed firms

Abstract

This paper investigates the impact of the Insolvency and Bankruptcy Code (IBC) on the dividend policy of financially distressed Indian firms. Utilizing a dataset of 33,820 firm-year observations from 2003 to 2023, we employ a difference-in-difference framework to examine how the introduction of IBC influences dividend payouts. Our findings reveal that distressed firms pay more dividends post IBC than non distressed firms, primarily benefiting underlevered distressed firms by enhancing their access to credit. Conversely, overlevered distressed firms experience a reduction in dividend payouts post-IBC. Additionally, the study highlights that standalone distressed firms are more likely to increase dividend payouts post-IBC compared to their business group-affiliated counterparts, due to the latter's access to internal capital markets. These insights contribute to the understanding of how bankruptcy reforms impact the financial strategies of distressed firms and provide valuable implications for policymakers and stakeholders in emerging economies.