Access to internal capital, creditor rights and corporate borrowing: Does group affiliation matter?

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 62; p. 101585
• Main Authors: Thapa, Chandra, Rao, Sandeep, Farag, Hisham, Koirala, Santosh
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2020
• Subjects: Business group firms; Corporate borrowing; Creditor protection; Firm performance; Internal capital; Standalone firms; Internal capital; G32; Standalone firms; Corporate borrowing; Firm performance; G34; Business group firms; Creditor protection; G38
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2020.101585

We examine whether the effect of increased creditor rights on corporate borrowing depends on firm's access to internal capital. By exploiting a creditor protection reform in India, empirical outcomes strongly indicate that strengthening of creditor rights leads to increased corporate borrowing among firms that have constrained access to internal capital compared to business group affiliated firms, which have relatively easier access to internal capital. Further, the increased corporate borrowing by firms with constrained access to internal capital, in the post-reform period, is associated with a greater expansion of real investments, improved operational performance, and better market valuation. Taken together, these findings indicate that expanding creditor rights may aid in improving allocative efficiency. •Expansion of creditor rights leads to increased corporate borrowing among firms that have constrained access to internal capital.•Business group firms with no financial institution in their affiliation experience an increase in corporate borrowing following creditor rights reform.•Increased corporate borrowing by standalone firms is associated with higher levels of real investments, improved operational performance, and better market valuation.