Does Debt Contract Enforcement Costs Affect Financing and Asset Structure?

We use staggered changes in debt contract enforcement costs in India to estimate it's causal effect on financing and asset maturity. Consistent with existing theoretical models, we find that a reduction in enforcement costs is associated with an increase in long-term debt and a reduction in short-term debt and trade credit. The increase in debt maturity is confined to firms that borrow from multiple lenders in the pre-reform period, to firms that borrow from a diverse set of lenders, and to smaller firms. We also find that firms reduce the number of banks that they borrow from after the judicial reform. Consistent with enforcement costs affecting firm investments, we find that firms increase (decrease) the amount of long-term (short-term) assets on their balance sheet. Our results highlight that debt contract enforcement costs can have significant effects on firm financing and investment, and show that improvements in contract enforcement may be an important step for emerging markets to attract private investments in long-term infrastructure projects, an urgent need in many countries