How Do Weak Creditors' Rights Incentivize Opportunistic Bankruptcy? A Cautionary Tale from India
In institutional regimes with weak creditors' rights, some company insiders might take advantage of bankruptcy rules by intentionally making their companies look less valuable. This creates problems for creditors and makes it harder for these companies to succeed in the future. To shed new light on the drivers of such opportunistic behaviors, recent research compares bankrupt British, American and Indian firms. It shows that Indian firms were more likely to be classified as “willful defaulters” indicating that bankruptcy decisions may be due to insiders' opportunistic behavior. It also suggests that such fraudulent bankruptcy behaviors can be countered through market reforms.