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Quiet Life No More? Corporate Bankruptcy and Bank Competition

  • Todd Gormley, Nandini Gupta and Anand Jha
Abstract

Pursuing delinquent borrowers requires considerable effort, and creditors may lack the incentive to exert this costly effort in uncompetitive banking sectors. To examine this, we use a uniquely large data set of public and private corporate bankruptcy filings spanning a banking-sector reform that deregulated bank entry across different regions of India. We find that increased banking competition is associated with more firms seeking a stay on assets, a decline in bankruptcy duration, and a shift toward workouts rather than liquidations. The results are consistent with creditors exerting greater effort to pursue delinquent firms and resolve bankruptcies more quickly when competition increases.

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Corresponding author
* Gormley (corresponding author), gormley@wustl.edu, Washington University in St. Louis Olin Business School; Gupta, nagupta@indiana.edu, Indiana University Kelley School of Business; and Jha, anand.jha@wayne.edu, Wayne State University Ilitch School of Business.
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1

We are very grateful to Warren Bailey (the referee), whose suggestions have greatly improved the paper, and we thank Paul Malatesta (the editor) for his guidance. We also thank Franklin Allen, Meghana Ayyagari, Richard Rosen, Irina Stefanescu, Greg Udell, Vijay Yerramilli, and Zhipeng Zhang for valuable comments. We also thank participants of the 2010 Financial Intermediation Research Society Annual Conference, the 2010 Centre for Analytical Finance at the Indian School of Business (CAF-ISB) Summer Research Conference in Finance (Hyderabad), and the 2010 Hong Kong University of Science and Technology Corporate Finance Symposium, and seminar participants at George Washington University, the University of North Carolina, Indiana University, and The University of Pennsylvania.

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