Creditor Rights, Threat of Liquidation, and Labor-Capital Choice of Firms

54 Pages Posted: 27 Jan 2019

See all articles by Shashwat Alok

Shashwat Alok

Indian School of Business (ISB), Hyderabad

Ritam Chaurey

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Vasudha Nukala

Washington University in St. Louis - John M. Olin Business School

Date Written: December 2018

Abstract

In 2002, a legal reform introduced in India allowed secured creditors to seize and liquidate the defaulter’s assets. We study firms’ choice between capital and labor in response to these strengthened creditor rights by exploiting variation in their pre-policy proportion of collateralizable assets. We find that firms increased employment, reduced their capital investments, and substituted secured formal credit with trade credit. These results are consistent with an increased threat of liquidation for firms. We find support for our main results across regions with different pre-policy court-eciency and across industries with different elasticities of substitution between capital and labor.

Keywords: Labor and Finance, Creditor Rights, Employment, Labor-Capital Choice, Labor Intensity, SARFAESI

JEL Classification: G28, G32, G33, J23, K22

Suggested Citation

Alok, Shashwat and Chaurey, Ritam and Nukala, Vasudha, Creditor Rights, Threat of Liquidation, and Labor-Capital Choice of Firms (December 2018). Indian School of Business, Available at SSRN: https://ssrn.com/abstract=3316630 or http://dx.doi.org/10.2139/ssrn.3316630

Shashwat Alok (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India
914023187188 (Phone)

Ritam Chaurey

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

Vasudha Nukala

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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