Rawal, Dilesh; Mahakud, Ji end a; Mish a, Rohan Kuma
A icle
Do s onge c edi o s’ igh s and an e icien bank up cy p ocess a ec
he speed o adjus men o a ge capi al s uc u e? E idence om a
quasi-na u al expe imen
Cogen Economics & Finance
P o ided in Coope a ion wi h:
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Sugges ed Ci a ion: Rawal, Dilesh; Mahakud, Ji end a; Mish a, Rohan Kuma (2024) : Do s onge
c edi o s’ igh s and an e icien bank up cy p ocess a ec he speed o adjus men o a ge capi al
s uc u e? E idence om a quasi-na u al expe imen , Cogen Economics & Finance, ISSN 2332-2039,
Taylo & F ancis, Abingdon, Vol. 12, Iss. 1, pp. 1-13,
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Do s onge c edi o s’ igh s and an efficien
bank up cy p ocess affec he speed o
adjus men o a ge capi al s uc u e? E idence
om a quasi-na u al expe imen
Dilesh Rawal, Ji end a Mahakud & Rohan Kuma Mish a
To ci e his a icle: Dilesh Rawal, Ji end a Mahakud & Rohan Kuma Mish a (2024) Do s onge
c edi o s’ igh s and an efficien bank up cy p ocess affec he speed o adjus men o a ge
capi al s uc u e? E idence om a quasi-na u al expe imen , Cogen Economics & Finance,
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FINANCIAL ECONOMICS | RESEARCH ARTICLE
Do s onge c edi o s’ igh s and an e icien bank up cy p ocess
a ec he speed o adjus men o a ge capi al s uc u e? E idence
om a quasi-na u al expe imen
Dilesh Rawal
a
, Ji end a Mahakud
a
and Rohan Kuma Mish a
b
a
Depa men o Humani ies and Social Sciences, Indian Ins i u e o Technology, Kha agpu (IIT Kha agpu ), Kha agpu ,
India;
b
Vinod Gup a School o Managemen , Indian Ins i u e o Technology, Kha agpu (IIT Kha agpu ), Kha agpu , India
ABSTRACT
This s udy in es iga es he impac o he Insol ency and Bank up cy Code (IBC) on
he capi al s uc u e speed o adjus men (SOA) o Indian i ms. The IBC, in oduced in
2016, signi ican ly enhanced c edi o s’ igh s and s eamlined he bank up cy p ocess,
p o iding a quasi-na u al expe imen o assess i s in luence on i ms’le e age dynam-
ics. U ilising a panel da a me hodology and p opensi y sco e ma ching-based di e -
ence-in-di e ences (PSM-DID) eg ession; we ca ego ise i ms in o o e -le e aged
( ea men ) and unde -le e aged (con ol) g oups. Ou indings e eal ha he IBC sig-
ni ican ly inc eased he SOA o o e -le e aged i ms, compelling hem o educe deb
le els swi ly o a oid inancial dis ess and bank up cy. Con e sely, unde -le e aged
i ms exhibi ed a dec eased SOA, e lec ing a s a egic shi owa ds inancial s abili y
o e le e aging bene i s. These esul s unde sco e he c i ical ole o egula o y ame-
wo ks in shaping co po a e inancial s a egies and align wi h he dynamic ade-o
heo y, highligh ing i ms’ac i e adjus men owa ds op imal capi al s uc u es. The
s udy con ibu es o he li e a u e on capi al s uc u e SOA by p o iding insigh s in o
how legal and ins i u ional changes in an eme ging ma ke in luence co po a e inan-
cial beha iou , wi h signi ican implica ions o policymake s, egula o s, and co po a e
execu i es.
IMPACT STATEMENT
The objec i e o his s udy was o in es iga es he e ec o he Insol ency and
Bank up cy Code (IBC) on he capi al s uc u e adjus men speed o Indian i ms. The
s udy e eals ha he IBC has signi ican ly accele a ed he adjus men speed o o e -
le e aged i ms, d i ing hem o apidly dec ease deb le els o mi iga e inancial
dis ess. In con as , unde -le e aged i ms exhibi ed a slowe adjus men speed,
indica ing a s a egic ocus on inancial s abili y o e inc eased le e age. These ind-
ings highligh he ans o ma i e e ec o egula o y amewo ks on co po a e inan-
cial s a egies, o e ing key insigh s o policymake s, egula o s, and co po a e
execu i es. This esea ch no only enhances he unde s anding o capi al s uc u e
dynamics in eme ging ma ke s bu also p o ides empi ical e idence ha can guide
u u e egula o y policies and s a egic inancial decision-making in he co po a e
sec o .
ARTICLE HISTORY
Recei ed 17 No embe 2023
Re ised 5 Augus 2024
Accep ed 15 Augus 2024
KEYWORDS
Capi al s uc u e; speed o
adjus men ; bank up cy
code; c edi o igh ;
dynamic capi al s uc u e;
IBC; le e age dynamics
SUBJECTS
Finance; Co po a e Finance;
Banking & Finance Law
1. In oduc ion
Capi al s uc u e e e s o he mix u e o deb and equi y a i m uses o inance i s ope a ions and
g ow h. I is a undamen al aspec o a i m’s inancial s a egy because i in luences i s isk exposu e,
cos o capi al, capaci y o sus ained g ow h, compe i i e ad an age and, ul ima ely, sha eholde alue.
The s a ic ade-o heo y sugges s ha i ms ha e an op imal capi al s uc u e ha maximises hei
alue by balancing he ax bene i s o deb inancing agains he inancial dis ess and bank up cy cos s
CONTACT Dilesh Rawal [email p o ec ed] Depa men o Humani ies and Social Sciences, Indian Ins i u e o Technology,
Kha agpu (IIT Kha agpu ), Kha agpu , India
ß2024 The Au ho (s). Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/licenses/by/4.0/), which
pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed. The e ms on which his a icle has been
published allow he pos ing o he Accep ed Manusc ip in a eposi o y by he au ho (s) o wi h hei consen .
COGENT ECONOMICS & FINANCE
2024, VOL. 12, NO. 1, 2394490
h ps://doi.o g/10.1080/23322039.2024.2394490
associa ed wi h deb (Modigliani & Mille , 1963). Acco ding o his heo y, ans e ing a i m’s asse s
om sha eholde s o c edi o s in he e en o bank up cy de e s i ms om holding highe deb le els.
Howe e , his ans e is con ingen on he s eng h o c edi o s’ igh s and he e ec i eness o hei
implemen a ion wi hin he coun y’s legal amewo k (La-Po a e al., 1997). Consequen ly, s onge c ed-
i o s’ igh s and an e icien bank up cy p ocess eme ge as c ucial de e minan s in shaping a i m’s cap-
i al s uc u e (Bose e al., 2021).
Be o e enac ing he Insol ency and Bank up cy Code (hence o h IBC) in 2016, he Indian legal ame-
wo k p esen ed signi ican obs acles o c edi o s seeking o eco e deb . C edi o s p ima ily elied on
he Deb Reco e y T ibunal (DRT) Ac and he Secu i iza ion and Recons uc ion o Financial Asse s and
En o cemen o Secu i y In e es s (SARFAESI) Ac o eco e hei claims. The DRT Ac cons ained c ed-
i o s by equi ing cou o ibunal in e en ion o ad ance hei p io i y claims agains a de aul ing i m.
Con e sely, he SARFAESI Ac empowe ed c edi o s o seize a de aul ing i m’s asse s wi hou cou o
ibunal in ol emen . Howe e , his sys em had limi a ions, mainly when he deb o ’s colla e al was
insu icien o mee hei obliga ions, compelling c edi o s o na iga e he complex and cos ly DRT p o-
cess o eco e hei dues.
To add ess hese sho comings, he Indian go e nmen in oduced he IBC on 28 May 2016, ushe ing
in a new e a o deb collec ion. The IBC was a pi o al solu ion, wi h one o i s key s eng hs being a
ime-bound esolu ion p ocess, in s a k con as o he p o ac ed and complex p ocedu es o he pas .
The IBC es ablished a s ic imeline ha allowed o he swi handling o insol ency cases wi hin
330 days, wi h a possible 90-day ex ension. This c ucial shi ensu ed c edi o s could expec a mo e e i-
cien and expedi ious esolu ion o hei claims, signi ican ly educing he ime and cos in ol ed in he
deb eco e y p ocess (Bose e al., 2021).
The implemen a ion o he IBC has signi ican ly ans o med he Indian co po a e landscape. In con-
as o he p e ious ‘deb o -in-possession’app oach, he code has in oduced a ‘c edi o -in-con ol’
model, in which he c edi o s ans e he managemen o a de aul ing i m o a esolu ion p o essional.
This shi in powe dynamics has been c ucial in add essing he issue o con olling sha eholde s o
di ec o s’ eluc ance o ini ia e he insol ency p ocess, as hey now ace he p ospec o losing con ol
o he i m. Fu he mo e, he IBC has c ea ed dedica ed bank up cy cou s, known as he Na ional
Company Law T ibunal, o handle insol ency cases, p o iding a specialised and s eamlined legal ame-
wo k o hei esolu ion.
These changes may ha e a signi ican impac on he speed a which i ms change hei capi al s uc-
u es o hei op imal le els. P io s udies ha e in es iga ed he in luence o IBC on co po a e le e age
and bo owing cos s, inding ha i ms u ilise less le e age and ace educed bo owing cos s ollowing
he IBC’s implemen a ion (Singh e al., 2023). Howe e , he e is limi ed esea ch ha explo es he impac
o enhanced c edi o s’ igh s and an e icien bank up cy p ocess, as exempli ied by he IBC, on he
i m’s SOA o capi al s uc u e, excep (Kuma , 2024), which in es iga ed how IBC has changed he SOA
o inancial cons ained i m s uncons ained i m.
Howe e he e is no s udy which has in es iga ed he impac o IBC on SOA o o e -le e ed and
unde -le e ed i ms, al hough he dynamic ade-o heo y (K aus & Li zenbe ge , 1973) p o ides su i-
cien heo e ical suppo o his impac . Unde s anding he impac o he IBC on he SOA o capi al
s uc u e is essen ial o many easons. I p o ides an unde s anding o how legal and ins i u ional
changes a ec co po a e inancial p ac ices, which holds signi ican implica ions o policymake s and
egula o s. Secondly, i adds o he body o esea ch on capi al s uc u e by showing how deb eco e y
and bank up cy wo k in an eme ging ma ke , which is e y di e en om de eloped ma ke s. Finally,
he ou comes o his esea ch can p o ide insigh s o co po a e execu i es ega ding he ad an ages
and disad an ages o sus aining a ious deg ees o le e age and changing le e age amids changing
egula o y en i onmen s.
Economic logic sugges s ha insol ency and bank up cy a e pa icula ly c ucial o o e -le e aged
i ms, cha ac e ised by a deb le el exceeding hei op imal capi al s uc u e. O e -le e aged i ms acing
highe bank up cy isks a e likely mo e esponsi e o he egula o y amewo ks p o ided by he IBC,
which may lead o quicke adjus men s in hei capi al s uc u e. This con as s wi h unde -le e aged
i ms, whe e he u gency and po en ial o deb s uc u e adjus men a e inhe en ly lowe . The IBC’s
in oduc ion in 2016 se ed as a quasi-na u al expe imen in his s udy. We used a panel da a
2 D. RAWAL, J. MAHAKUD, AND R.K. MISHRA
me hodology and di e ence-in-di e ences eg ession me hod o examine he impac o hese changes
in c edi o s’ igh s and he bank up cy p ocess on he speed o Indian i ms’le e age adjus men . This
s udy ca ego ises o e -le e aged i ms as he ea men g oup and unde -le e aged i ms as he con ol
g oup. This classi ica ion acili a es ou di e ence-in-di e ences analysis o measu e he IBC’s a ying
impac s on hese wo g oups. By examining he con e gence o hese g oups owa d hei a ge capi al
s uc u es ollowing IBC implemen a ion, we gain aluable insigh s in o he e ec i eness and in luence
o such egula o y measu es on co po a e inancial beha iou . The esul s o his s udy indica e ha he
implemen a ion o he IBC has signi ican ly inc eased he SOA o o e -le e aged i ms while dec easing
he SOA o unde -le e aged i ms. The magni ude o his ela ionship is much s onge o o e -le e -
aged i ms han unde -le e aged i ms.
The es o his a icle is o ganised as ollows: Sec ion 2 e iews he ele an li e a u e and de elops
he hypo heses. Sec ion 3 desc ibes he da a and me hodology. Sec ion 4 p esen s he empi ical esul s
and discusses he indings. Sec ion 5 p o ides he conclusion. Sec ion 6 discusses he implica ions.
Sec ion 7 ou lines he limi a ions and u u e scope o esea ch.
2. Li e a u e e iew and hypo hesis de elopmen
This sec ion is di ided in o ou subsec ions. The i s subsec ion summa ises he li e a u e on he de e -
minan s in luencing he a ge capi al s uc u e. The second subsec ion comp ehensi ely e iews he ac-
o s ha impac he SOA in i ms’le e age. The hi d subsec ion del es in o he exis ing li e a u e on
implemen ing he IBC. The inal subsec ion is dedica ed o he o mula ion o hypo heses.
2.1. De e minan s o i m’s a ge capi al s uc u e
Th ee p ima y conside a ions eme ge when e alua ing deb inancing agains equi y inancing:
ax-deduc ible in e es paymen s, s ic deb obliga ions, and signi ican liquida ion igh s. While deb
inancing o e s ax bene i s, i also poses isks o inancial dis ess. A i m de e mines i s a ge capi al
s uc u e, balancing he bene i s and cos s o deb (Ho akimian e al., 2001).
Key ac o s in luencing op imal capi al s uc u e include dep ecia ion deduc ions, ope a ing losses
and ax c edi s (DeAngelo & Masulis, 1980; G aham, 1996; Mackie-Mason, 1990). Companies wi h ola ile
cash lows o highe sys ema ic isk should op o less deb (Boo h e al., 2001). Financial pe o mance
can also in luence le e age decisions (Abdullah & Tu soy, 2021). A posi i e ela ionship exis s. S udies
ha e also shown a posi i e ela ionship be ween i m di e si ica ion and deb u ilisa ion (Be ge e al.,
1995; Commen & Ja ell, 1995). Asse angibili y posi i ely impac s a ge le e age (Rajan & Zingales,
1995; Ti man & Wessels, 1988). Fi ms wi h in angible asse s may p e e inancial lexibili y (Ha is & Ra i ,
1991). Fi ms wi h highe g ow h oppo uni ies ha e ela i ely lesse a ge le e age a ios as hey y o
conse e hei deb capaci y (F ank & Goyal, 2009). Fi m ha has in angible asse s y o e ain cash
ese es o u u e in es men s. Hence, he a ge le e age is less o i ms wi h a lo o R&D expenses
(Ti man & Wessels, 1988). The indus y median le e age a io in luences he a ge capi al s uc u e as
i ms align hei le e age wi h indus y no ms (Ho akimian e al., 2001). Fu he mo e, agency cos s can
signi ican ly a ec he capi al s uc u e (Sdiq & Abdullah, 2022).
2.2. De e minan s o he speed o le e age adjus men
Ea ly empi ical e idence by Fische e al. (1989) on he SOA o a ge capi al s uc u e e ealed ha ma -
ke ine iciencies and cos s pa ially lead i ms o adjus o long- e m inancial a ge s. (Flanne y &
Rangan, 2006) no ed ha i ms adjus hei le e age o balance he di e ence be ween ac ual and
desi ed capi al s uc u es. Fi ms wi h subop imal le e age incu legal and in es men bank ees, o cing
hem o change hei le e age only when hey signi ican ly de ia e om hei a ge capi al s uc u e.
G owing i ms ha e mo e lexibili y in adjus ing hei capi al s uc u e due o a ious inancing
op ions, unlike non-g owing i ms ha ace se e e signalling consequences (D obe z & Wanzen ied,
2006; Mukhe jee & Mahakud, 2010). La ge companies can quickly al e hei capi al s uc u es due o
ewe ixed cos s and be e access o public in o ma ion ((Ha is & Ra i , 1991). P o i abili y nega i ely
COGENT ECONOMICS & FINANCE 3
co ela es wi h SOA, as less p o i able i ms adjus quickly due o highe cos s o inancial dis ess
(Mukhe jee & Mahakud, 2010). Fi ms wi h highe le e age adjus as e o minimise inancial dis ess
cos s ((Byoun, 2008). Co po a e go e nance plays a c ucial ole in SOA. S ong go e nance, cha ac e ised
by accoun abili y, anspa ency, and educed agency cos s, acili a es as e adjus men s (Chang e al.,
2014; Liao e al., 2015; Nguyen e al., 2021). SOA is posi i ely in luenced by boa d size, independence,
gende di e si y, and manage ial owne ship. In con as , i is nega i ely a ec ed by CEO duali y.
Economic condi ions in luence SOA, wi h as e adjus men s du ing economic booms han ecessions
(Cook & Tang, 2010; D obe z e al., 2015). High unce ain y hampe s he abili y o adjus owa d op imal
capi al s uc u es (C¸olak e al., 2018). Business cycle isks also slow he adjus men p ocess (Bajaj e al.,
2023). De eloped inancial ma ke s, e icien legal amewo ks, and s onge sha eholde p o ec ions
expedi e SOA. Financial libe alisa ion posi i ely a ec s SOA, wi h coun ies ha ing s ong law en o ce-
men and c edi o igh s adjus ing mo e quickly (Amee , 2013). Equi y misp icing a ec s SOA, wi h as e
adjus men s when s ocks a e o e alued and slowe when unde alued (Wa e al., 2012). Deb ma u i y
misalignmen also in luences SOA (Zhou e al., 2016).
2.3. Li e a u e on he insol ency and bank up cy code (IBC)
Implemen ing he IBC has been pi o al in eshaping India’s insol ency esolu ion amewo k. The IBC
seeks o uni y and e ise laws conce ning he eo ganisa ion and insol ency esolu ion o co po a e
en i ies, pa ne ship i ms, and indi iduals in a p omp manne . I s objec i es include maximising asse
alue, os e ing en ep eneu ship, and balancing he in e es s o all s akeholde s. The IBC has signi i-
can ly imp o ed he esolu ion p ocess in India by p o iding a s uc u ed mechanism o insol ency
esolu ion. I has imp o ed eco e y a es and educed esolu ion ime, con ibu ing o a heal hie c edi
en i onmen . S udies also highligh he challenges aced du ing implemen a ion, including judicial
delays, in as uc u al inadequacies, and he need o con inuous e o ms o add ess eme ging issues
(Ghosh, 2022). The IBC amewo k has acili a ed a shi om deb o -in-possession o c edi o -in-con ol,
empowe ing c edi o s and p omo ing a mo e disciplined c edi cul u e (Aga wal & Singh i, 2023).
Empi ical e idence sugges s a posi i e impac on he lending en i onmen , wi h inc eased willingness
among banks o ex end c edi due o imp o ed eco e y p ospec s. Addi ionally, he IBC has encou aged
co po a e bo owe s o adop be e inancial p ac ices o a oid insol ency p oceedings (Bose e al.,
2021).
The in oduc ion o he IBC has also in luenced capi al s uc u e decisions, as i ms a e now mo e cau-
ious abou hei le e age a ios. The h ea o insol ency p oceedings unde he IBC is a de e en
agains excessi e bo owing, leading o mo e p uden inancial managemen (Kuma , 2024). Mo eo e ,
he IBC has os e ed a ma ke o dis essed asse s, a ac ing in es o s and acili a ing he es uc u ing
o inancially s essed companies. Implemen ing he IBC ep esen s a signi ican e o m in India’s
insol ency esolu ion landscape. I has b ough abou g ea e anspa ency, e iciency, and accoun abil-
i y, con ibu ing o he s abili y and obus ness o he inancial sys em. Con inuous moni o ing and
adap i e e o ms a e essen ial o add ess e ol ing challenges and ensu e he long- e m success o he
IBC amewo k.
2.4. Hypo hesis de elopmen
This subsec ion ou lines he hypo heses o ou s udy, oo ed in he heo e ical amewo k p o ided by
he dynamic ade-o heo y (K aus & Li zenbe ge , 1973) and suppo ed by empi ical e idence om he
li e a u e e iew. The p ima y aim o his pape is o in es iga e how he in oduc ion o he IBC has
in luenced he capi al s uc u e speed o adjus men (SOA) o Indian i ms.
2.4.1. The dynamic ade-o heo y and capi al s uc u e adjus men
The dynamic ade-o heo y (K aus & Li zenbe ge , 1973) complemen s he s a ic ade-o heo y
(Modigliani & Mille , 1963) by analysing i ms’capi al s uc u e o e mul iple pe iods and accoun ing o
he adjus men bene i s and cos s ha a ise when i ms change hei le e age owa ds he op imal le el.
This heo y sugges s ha i ms ha e a a ge capi al s uc u e. S ill, hey may no always be a he
4 D. RAWAL, J. MAHAKUD, AND R.K. MISHRA
op imal le e age a io due o a ying bene i s and cos s o le e age adjus men s. As a esul , i ms
a emp o pa ially adjus o hei a ge le el (Fische e al., 1989; Flanne y & Rangan, 2006), weighing
he bene i s o ope a ing a op imal le e age agains he incu ed adjus men cos s. Exis ing empi ical
e idence sugges s ha o e 80% o i ms ac i ely pu sue a a ge capi al s uc u e.
When a i m’s ac ual le e age de ia es om i s a ge , i incu s ‘de ia ion cos s,’which incen i ise he
i m o adjus i s capi al s uc u e. O e le e aged i ms ace inancial dis ess and bank up cy cos s, while
unde le e aged i ms o go he ax ad an ages o deb . These de ia ion cos s mo i a e i ms o ealign
hei le e age owa ds he a ge a io. Howe e , ‘adjus men cos s’impede he p ocess, p e en ing
immedia e and comple e ealignmen . This leads o i ms exhibi ing la ge, pe sis en de ia ions om
hei a ge le e age, adjus ing only pa ially o e ime. Consequen ly, i ms weigh he bene i s o
achie ing op imal le e age (i.e. de ia ion cos ) agains he cos s in ol ed in making he necessa y
adjus men s (i.e. adjus men cos ) o de e mine he speed o adjus men o he a ge capi al s uc u e.
The in oduc ion o IBC in India may ha e signi ican ly accele a ed he pace a which i ms change
hei le e age owa ds hei op imal le e age le els. By s eng hening c edi o s’ igh s and s eamlining
he bank up cy p ocess, he IBC has educed he ime and cos associa ed wi h deb eco e y. This educ-
ion in eco e y ime and expense has, in u n, inc eased he cos o de ia ing om op imal le e age o
o e -le e aged i ms. Such i ms now ace a highe isk o bank up cy, po en ially leading o a loss o con-
ol by sha eholde s and a akeo e by c edi o s. Consequen ly, he inc eased e iciency and anspa ency
o he bank up cy p ocess unde he IBC incen i ise hese i ms o educe hei deb le els o p e en los-
ing con ol p oac i ely. The inc eased e iciency and anspa ency o he bank up cy p ocess unde he
IBC acili a e his p oac i e adjus men , making i mo e cos ly o i ms o main ain high deb le els due
o he enhanced h ea o swi c edi o ac ion in he e en o de aul . The e o e, o e -le e aged i ms a e
mo e likely o swi ly ealign hei capi al s uc u es o a oid he ad e se consequences o bank up cy,
which may esul in a quicke con e gence owa ds hei a ge capi al s uc u es.
2.4.2. Impac o IBC on o e -le e aged i ms
O e -le e aged i ms wi h deb le els exceeding hei op imal capi al s uc u e ace signi ican inancial
dis ess and bank up cy isks. The in oduc ion o he IBC, which enhances c edi o s’ igh s and s eam-
lines he bank up cy p ocess, inc eases he cos o de ia ion om he op imal le e age o hese i ms.
The IBC’s e icien and ime-bound esolu ion amewo k aises he h ea o swi c edi o ac ion, com-
pelling o e -le e aged i ms o educe hei deb le els mo e apidly o a oid bank up cy and he conse-
quen loss o con ol.
Hypo hesis 1: Implemen ing he IBC has inc eased he speed o adjus men owa ds he a ge capi al s uc u e
o o e -le e aged i ms.
This hypo hesis is g ounded in he expec a ion ha he s eng hened legal amewo k and imp o ed
c edi o con ol mechanisms unde he IBC will mo i a e o e -le e aged i ms o accele a e hei capi al
s uc u e adjus men s o mi iga e he heigh ened bank up cy isks.
2.4.3. Impac o IBC on unde -le e aged i ms
On he o he hand, unde -le e aged i ms a e cha ac e ised by deb le els below hei op imal le e age
a io, he eby o going ax bene i s associa ed wi h deb . Al hough hese i ms do no ace immedia e
inancial dis ess, in oducing he IBC may in luence hei capi al s uc u e adjus men s. Howe e , he
u gency and impac a e expec ed o be less p onounced compa ed o o e -le e aged i ms, as he
p ima y d i e o adjus men in unde -le e aged i ms is he oppo uni y cos o no ully u ilising deb
ax shields a he han he isk o bank up cy.
Hypo hesis 2: Implemen ing he Insol ency and Bank up cy Code (IBC) has a nega i e impac on he speed o
adjus men owa ds he a ge capi al s uc u e o unde -le e aged i ms, and he magni ude o he impac is
lesse han o e -le e aged i ms.
This hypo hesis sugges s ha unde -le e aged i ms may change hei le e age a io in esponse o
he IBC. Howe e , he changes will be less subs an ial and slowe han hose o o e -le e aged i ms,
p ima ily because he immedia e isks associa ed wi h unde -le e age a e less se e e.
COGENT ECONOMICS & FINANCE 5
3. Empi ical amewo k
3.1. Da a
We use he CMIE P owess da abase o ga he inancial da a o all lis ed i ms in India om 2012 o
2019. Following s anda d p ac ices, we exclude inancial and u ili y i ms om he analysis because a i-
ous egula ions go e n hei capi al s uc u e decisions. To ensu e meaning ul compa isons, we include
only i ms wi h comple e in o ma ion ac oss all a iables and yea s du ing ou s udy pe iod. As a esul ,
we ha e a balanced da ase comp ising 10,416 obse a ions om 1,302 i ms. Fu he p opensi y sco e-
based ma ching iden i ied 645 con ol i ms o 645 ea men i ms, yielding a inal da ase o 7,722
i m-yea obse a ions o 1,290 i ms o es he hypo hesis. To manage ou lie s, we winso ised all i m-
le el a iables a he op and bo om 1% o hei dis ibu ions.
3.2. Va iable de ini ion
A i m is de ined as o e -le e aged i i s obse ed le e age in a pa icula yea exceeds i s a ge le e -
age o ha yea . A i m is classi ied as a ea men i m (o e -le e aged) i i emains o e -le e aged o
a leas 3 ou o 4 yea s du ing he p e-IBC pe iod. We cons uc ed ’OL’as a dummy a iable, which
akes he alue o 1 o o e -le e aged i ms ( ea men g oup) and ze o o unde -le e aged i ms
(con ol g oup). De ini ions o o he a iables a e de ailed in Appendix A.
3.3. Me hodology
3.3.1. psm-did
To de e mine he causal ela ionship be ween he IBC and he speed o le e age adjus men , we u ilise
a p opensi y sco e ma ching-based di e ence-in-di e ences (PSM-DID)app oach. Common suppo is a
c i ical p e equisi e o an e ec i e di e ence-in-di e ences analysis, which equi es su icien o e lap
be ween he ea men and con ol i ms on ele an cha ac e is ics (Singh e al., 2023).
Howe e , Panel A o Table 1 indica es s a is ically signi ican di e ences in key i m-le el co a ia es
be ween he ea ed and con ol g oups a he 1% le el, sugges ing a lack o o e lap. We mus pe o m
p opensi y sco e ma ching wi hou such o e lap o iden i y a well-ma ched sample. To achie e his, we
calcula e he p opensi y sco e using he ollowing logis ic eg ession model
OLI ¼b0þSizei þP o i þTangi þDepi þMTBi þR&Di þRD Dummyi þIndus y le e agei þei (1)
In his model, he dependen a iable is a bina y indica o , aking 1 o o e -le e aged i ms and 0 o
unde -le e aged i ms. P ima y i m-le el co a ia es include P o i abili y, Tangibili y, Size, Dep ecia ion,
G ow h Oppo uni y, R&D expenses, R&D Dummy, and median indus y le e age. We employed a nea -
es neighbou ma ching algo i hm wi h eplacemen (Singh e al., 2023) o pai ea men and con ol
i ms. This esul ed in 645 con ol i ms ma ched wi h 645 ea men i ms. Pos -ma ching diagnos ic
es s (T alue in Panel B o Table 1) con i med ha he p opensi y sco e ma ching me hod e ec i ely
educed obse a ional di e ences be ween he ma ched ea men and con ol g oups.
Table 1. Unma ched ( ull) sample and ma ched sample a ibu es.
Panel A: Full sample (wi hou ma ching) Panel B: Ma ched sample
Va iable T ea men Con ol T- alue T ea men Con ol T- alue
Size 7.98 8.98 −4.51 8.16 8.19 0.68
P o 0.09 0.07 −6.51 0.09 0.08 −1.64
Tang 0.32 0.29 −7.72 0.32 0.33 2.10
Dep 0.032 0.031 −3.05 0.033 0.033 −0.02
MTB 2.09 1.79 −4.40 2.05 2.01 −0.52
Median le e age 0.36 0.35 −3.46 0.366 0.371 1.66
R&D expenses 0.002 0.001 −7.14 0.002 0.002 −1.40
R&D dummy 0.64 0.73 9.38 0.64 0.64 −0.04
The mean alues o a iables a ec ing a ge le e age o he ull sample (Unma ched Sample) and he Ma ched Sample. The T Value indi-
ca es he signi icance o he di e ence in means be ween he ea men and con ol g oups. Signi icance le els a e deno ed by ,, and
o 1%, 5%, and 10%, espec i ely. De ini ions o he a iables can be ound in Appendix A.
6 D. RAWAL, J. MAHAKUD, AND R.K. MISHRA
We hen examine he pa allel end assump ion necessa y o he DiD analysis o he ma ched sample
(Kuma , 2024; Singh e al., 2023). Figu e 1 illus a es he SOA o ea men and con ol i ms, showing
ha hei le e age speed o adjus men ollows a pa allel end du ing p e- egula ion. Howe e , pos -
egula ion, he speed o le e age adjus men has inc eased o o e -le e aged i ms, a end no
obse ed in he con ol i ms.
3.3.2. Two-s age dynamic pa ial adjus men model
D awing om he wo k o (Cook & Tang, 2010; Flanne y & Rangan, 2006), we u ilise he basic
pa ial-adjus men model. This model se es as a ool o es ima ing how quickly a gi en i m co ec s
de ia ions om i s a ge , as a icula ed by:
LEVi, þ1−LEVi, ,j¼kLEV
i, þ1−LEVi,
þdi, þ1(2)
Whe e LEV
i, þ1Rep esen s he a ge le e age o i m i a yea , kis he Le e age SOA o all i ms in
he sample; LEVi, The le e age a io o he I i m a a ime can be measu ed ei he by ma ke le e age
(MLEV) o book le e age (BLEV).
The abo e model is es ima ed using a wo-s age p ocess. In he i s s age, a ge le e age has o be
es ima ed. As he a ge le e age LEV
i, þ1, is unobse able; ollowing Amini e al. (2021) and An e al.
(2021), he i ed alue o Eq (2) is used as a p oxy o he a ge le e age.
LEVi, þ1¼aiþbjXi, ,jþ i,þ i,þ i, þ1(3)
He e, Xi, ,jI is a se o p ima y i m-le el and indus y-le el co a ia es like P o i abili y, Tangibili y,
Size, Dep ecia ion, G ow h Oppo uni y, R&D expenses, R&D Dummy, and median indus y le e age.
These con ol a iables a e selec ed based on he li e a u e on de e minan s o a ge capi al s uc u e.
We include i m- and yea - ixed e ec s o accoun o unobse ed he e ogenei y ac oss i ms and
yea s.(Lemmon e al., 2008).
Using he a ge le e age es ima ed om he 1
s
s age, he speed o adjus men is es ima ed in he
second s age using he ollowing Equa ion.
DLEVI, þ1¼kDEVi,
ðÞ
þdi, þ1(4)
Whe e DLEVI, þ1is he ac ual change in le e age (LEVi, þ1−LEVi, ) made by a i m I, om yea o
þ1, which can be measu ed by he change in ma ke le e age (DMLEVI, þ1) o change in book le e age
(DBLEVI, þ1). DEVi, Is he de ia ion om a ge le e age (LEV
i, þ1−LEVi, ) which can be measu ed by
book le e age de ia ion ðBDEVi, ) o ma ke le e age de ia ion ðMDEVi, ).
The coe icien kmeasu es he a e a which i ms mo e hei le e age owa d he a ge om yea
o yea þ1. A highe ksigni ies a quicke speed o adjus men (SOA). Ne e heless, his model
p esumes ha all sample i ms adjus uni o mly ac oss all yea s.
To analyse he e ec o he IBC on he speed o adjus men (SOA) o o e -le e aged ( ea men )
i ms and unde -le e aged (con ol) i ms using a DID eg ession amewo k, we elax he assump ion o
Figu e 1. Va ia ion in capi al s uc u e Speed o adjus men . Figu e 1 shows he a ia ion in he SOA, de i ed using
Equa ion (4) om six h ee-yea olling eg essions. The i s subsample co e s 2012, 2013, and 2014, while he las
subsample includes 2017, 2018, and 2019.
COGENT ECONOMICS & FINANCE 7
