Regulations and Firm Financing: Impact of Clause 49 in India
45 Pages Posted: 20 Jul 2016
Date Written: July 17, 2016
Abstract
This paper provides new evidence of the effect of corporate governance on corporate capital structure. Using the Clause49 regulations introduced by the Security and Board Exchange of India in 2000 as a potential exogenous natural experiment, we assess the impact of the introduction as well as the completion of the reform on selected financial leverage measures of listed Indian firms. The reform strengthened investor protection through introduction of various transparency and disclosure rules as well as securing board independence. Difference-in-difference estimates using firm-level panel data for the period 1996-2014 suggest that the introduction and completion of Clause49 has led to a greater (lower) reliance on equity (debt) and also a reduction in reliance on bank loans among domestic listed (relative to cross-listed) Indian firms in our sample; these effects are more pronounced when we consider the completion rather than the introduction of the reform. We argue that these results can be attributed to the reduced information asymmetry between managers and investors and increased investor protection in the post-regulation years and provide some evidence in this respect. The paper also identifies heterogeneous impact of the reform among firms affiliated to business groups who have access to the group’s internal market, which in turn challenges the effectiveness of the reform.
Keywords: Corporate Governance Reforms, Clause 49, Firm Financing, Capital Structure, Bank Loans, Business Groups, Causal Impact, Difference-In-Difference Method, India
JEL Classification: K2, G3
Suggested Citation: Suggested Citation