Plausibly Exogenous [1667] - Debt Contracts (08/26/2024)

LHS Variable
Accounting practices

RHS Variable
Enforcement of debt contracts

Source of Exogenous Variation
In 1993, the Government of India passed a new law to establish special courts devoted solely to debt recovery suits from banks and financial institutions, called debt recovery tribunals (DRTs). The implementation of DRTs directly strengthened the enforcement of debt contracts and reduced lenders' litigation costs in at least four ways: (1) the specialized nature ensured DRTs were not congested,3 (2) the expedited legal procedures drastically reduced the time to resolve cases, (3) borrowers had less freedom in disposing of assets before judgment, and (4) specialized personnel provided more efficient execution of the verdict.

- Aghamolla and Li (2019), “Debt contract enforcement and conservatism: Evidence from a natural experiment”