Testing the impact of liquidation speed on leverage using Indian data

Biswajit Banerjee and Risto Herrala

The paper investigates the influence of the speed of liquidation of insolvent firms on leverage. The theoretical model presented formalizes the intuitive view that an increase in liquidation speed is expected to decrease average leverage as highly leveraged firms exit. Analysis of Indian data, however, suggests that an increase in liquidation speed increases average leverage. This finding is linked to influential observations at the right tail of the leverage distribution. We propose an asset-weighted variant of the proposition that holds with empirical data.

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Year of publication:	29 April 2024
Authors:	Banerjee, Biswajit ; Herrala, Risto
Publisher:	Helsinki : BOFIT, the Bank of Finland Institute for Emerging Economies
Subject:	Indian economy \| insolvency and bankruptcy code \| liquidation speed \| leverage \| Insolvenz \| Insolvency \| Indien \| India \| Kapitalstruktur \| Capital structure \| Liquidation \| Betriebliche Liquidität \| Corporate liquidity