Page 234 - ES 2020-21_Volume-1-2 [28-01-21]

Regulatory Forbearance: An Emergency Medicine, Not Staple Diet! 217

Figure 16: Weakening of Corporate Governance - Decrease in
Non-Promoter Directors on Board

Source: MCA (for restructured loans) and CMIE Prowess for the composition of boards
Pre-forbearance: Average percentage change two years after and before for firms restructured
during 2002-06
Post-forbearance: Average percentage change two years after and before for firms restructured
during 2009-15
restructured firms in the forbearance window. Total stalled projects (as a proportion of all capex
projects) increased by 40% (30%) during forbearance, while the same witnessed a decline of 12%
(18%) pre-forbearance. In other words, in the pre-forbearance period, firms likely re-initiated stalled
projects when injected credit through restructuring, whereas firms in the forbearance window
witnessed additional stalling, indicating a possible misuse of increased credit supply.

Box 6: Increase in the Power of Management for Firms
Benefitting from Forbearance
Using the difference-in-difference technique discussed in Box 3, this box demonstrates a
causal link between forbearance and increasing power of incumbent management using
panel regressions that control for all confounding factors. Here, firms are classified into two
groups that are similar on dimensions such as size, age, profitability, leverage, and solvency
but differ on their ability to obtain restructuring. This difference arises from their possible
relationships with the banks. Any difference in firm outcomes for the two groups could thus
be attributed to the difference in their likelihood of restructuring. Four outcomes are studied:
(i) proportion of independent directors on board, (ii) CEO duality or the likelihood of firm’s
CEO to also be the chairman of its board, (iii) connectedness in board measured through the
similarity in the biographies (age, education, other directorships, etc.) and (iv) proportion of
board directors nominated by banks. For certain variables, data availability is restricted to the
post-forbearance era. In that case, the outcomes are compared only during forbearance in a
single difference between treated and control firms. After organizing data at a firm-year level,
the following regression equation is estimated:
Y = α + β × Treatment × Post + β × Treatment + β × X + δ + ν + ϵ it
i
3
it
t
i
1
it
i
2
t