Results show that politically connected firms reduced their cash holdings following the implementation of the Insolvency and Bankruptcy Code in 2016, as new reforms better protected creditors through strict enforcement rights.
Authors
Kousik Ganguly, Lecturer, Jindal Global Law School, O.P. Jindal Global University, Sonipat, Haryana, India; Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur, West Bengal, India.
Ajay Kumar Mishra, Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur, West Bengal, India.
Summary
Using a sample of 1,953 listed firms on the National Stock Exchange from 2009 to 2021, we investigate whether politically connected firms alter their cash holding patterns following the Insolvency and Bankruptcy Code (IBC) reforms introduced in 2016. We also examine the impact of changes in a firm’s cash holdings on its performance.
Results show that politically connected firms reduced their cash holdings following the implementation of IBC in 2016, as new reforms better protected creditors through strict enforcement rights. We also find that politically connected firms with large amounts of cash perform poorly in the post-IBC period compared to their nonconnected peers. The results are robust after excluding the COVID-19 period and controlling for firm size, leverage, and business group affiliations.
Published in: Journal of Emerging Market Finance
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