Does an effective bankruptcy reform impact the selling cost behavior of firms? Evidence from India

Abstract

This study examined whether strengthening of creditors' rights impacts the selling cost behavior of firms or not? To investigate this question, the author exploited implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 in India as an exogenous policy shock. The author found that selling cost of firms in India in the pre‐implementation period were not “sticky”. Further, implementation of the IBC produced no impact on the selling cost behavior of Indian firms in the post‐implementation period. Nonetheless, legislation of the IBC was found to have lowered financial resources that firms devoted to their selling activities. In addition, firms that faced a higher risk of bankruptcy because of more leverage in the pre‐IBC period demonstrated greater response to promulgation of the IBC. Thus, it can be inferred that an effective bankruptcy reform has little impact on the selling cost behavior of firms but incentivizes them to devote lesser financial resources to their selling activities in order to lower their bankruptcy risk.