Access to Collateral and Corporate Debt Structure: Evidence from a Natural Experiment



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    • Vikrant Vig is with the London Business School. I would like to thank Patrick Bolton, Charlie Calomiris, Ray Fisman, Denis Gromb, Oliver Hart, Daniel Paravisini, and Bernard Salanie for many invaluable discussions and comments. In addition, I would like to thank Viral Acharya, Ken Ahern, Andres Almazan, Ken Ayotte, Tim Baldenius, Mike Barclay, Tomer Berkowitz, Alex Butler, Pierre Chiappori, Francesca Cornelli, Sid Dastidar, Doug Diamond, James Dow, Sapnoti Eswar, Maria Guadalupe, Charlie Hadlock, George Hall, Rainer Haselmann, Christopher Hennessy, Laurie Hodrick, Hagit Levy, Bentley Macleod, Ulf Nielsson, Francisco Perez-Gonzalez, Manju Puri, Raghu Rajan, Adriano Rampini, Tano Santos, Florian Schulz, Amit Seru, Cliff Smith, Suresh Sundaresan, Elu von Thadden, Jean Tirole, Paolo Volpin, and seminar participants at various departments. I would also like to thank the officials at the Bank of Baroda, Reserve Bank of India, ICICI, State Bank of India, and Dena Bank for helping me understand the Indian banking industry. In particular, I would like to thank Y.V. Reddy, Rakesh Mohan, R.B. Barman, Anil Khandelwal, Saibal Ghosh, and Sundando Roy for their generous support, feedback, and valuable comments. The usual disclaimer on errors applies here as well.


We investigate how firms respond to strengthening of creditor rights by examining their financial decisions following a securitization reform in India. We find that the reform led to a reduction in secured debt, total debt, debt maturity, and asset growth, and an increase in liquidity hoarding by firms. Moreover, the effects are more pronounced for firms that have a higher proportion of tangible assets because these firms are more affected by the secured transactions law. These results suggest that strengthening of creditor rights introduces a liquidation bias and documents how firms alter their debt structures to contract around it.