Finance Seminar with Nagpurnanand Prabhala, University of Maryland
The Department of Finance is proud to announce the upcoming seminar with Nagpurnanand Prabhala, Robert H. Smith School of Business, University of Maryland.
Nagpurnanand Prabhala will present:
Creditor Rights and Relationship Banking: Evidence from a Policy Experiment
Gursharan Singh Bhue, Indian School of Business
N. R. Prabhala, University of Maryland
Prasanna Tantri, Indian School of Business
We examine the relation between creditor rights and relationship banking by exploiting natural variation in creditor rights induced by changes in law. In 2002, a change in bankruptcy law in India significantly increased creditor rights by letting lenders repossess collateral and auction it without court intervention. We argue that the increase in creditor rights reduces the value of soft information gathered by relationship banks, leading firms and banks to shift away from relationship banking. We find empirical evidence consistent with this view. Relationship lending declines after the increase in creditor rights. This shift is more pronounced for banks that may have greater informational advantage, small firms and those not belonging to established business groups, and in geographic areas with low bank competition.