Creditor Rights and Related-Party Transactions: Evidence from the Implementation of the Insolvency Reforms in India

ABSTRACT Non-arm’s-length transactions between a firm and its related parties, or related-party transactions (RPTs), are widely used in emerging economies. We examine the effect of creditor rights on the usage of financing RPTs using the enactment of India’s Insolvency and Bankruptcy Code (IBC) of 2016 as a shock to creditor rights. We show that stronger creditor rights make arm’s-length external financing more attractive relative to RPT financing. In particular, we find that firms that are ex ante more likely to be affected by IBC (i.e., those with low asset tangibility) reduce their dependence on financing-related RPTs, in particular, RPT loan inflows. This effect is strengthened for firms with greater financial constraints and higher growth opportunities. Our findings suggest that creditor rights influence financing choices and contribute to our understanding of how insolvency reforms affect financing and RPTs in emerging markets.