Regulations and Firm Financing: Impact of Clause 49 in India

45 Pages Posted: 20 Jul 2016

See all articles by Zoya Saher

Zoya Saher

Queen Mary University of London; University of Surrey

Sarmistha Pal

University of Surrey; IZA Institute of Labor Economics

Tiago Pinheiro

University of Surrey

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

Saher, Zoya and Pal, Sarmistha and Pinheiro, Tiago, Regulations and Firm Financing: Impact of Clause 49 in India (July 17, 2016). Available at SSRN: https://ssrn.com/abstract=2810877

Zoya Saher (Contact Author)

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom
E14NS (Fax)

University of Surrey ( email )

Stag Hill
Guildford, Surrey GU2 5XH
United Kingdom

Sarmistha Pal

University of Surrey ( email )

Stag Hill
Guildford, England GU2 7XH
United Kingdom
01483 683995 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Tiago Pinheiro

University of Surrey ( email )

Guildford
Guildford, Surrey GU2 5XH
United Kingdom

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