We investigate the functioning of internal capital markets in Indian Business Groups. We document that intragroup loans are an important means of transferring cash across group firms and are typically used to support financially weaker firms. Evidence suggests that an important reason for providing support may be to avoid default by a group firm and consequent negative spillovers to the rest of the group. Consistent with such spillovers, the first bankruptcy in a group is followed by significant drops in external financing, investments and profits of other firms in the group and an increase in their bankruptcy probability.

We show that firms take more (but not necessarily excessive) risks when one of their directors experiences a corporate bankruptcy at another firm where they concurrently serve as a director. This increase in risk-taking is concentrated among firms where the director experiences a shorter, less-costly bankruptcy and where the affected director likely exerts greater influence and serves in an advisory role. The findings show that individual directors, not just CEOs, can influence a wide range of corporate outcomes. The findings also suggest that individuals actively learn from their experiences and that directors tend to lower their estimate of distress costs after participating in a bankruptcy firsthand.

Using a large data set of performance goals employed in executive incentive contracts, we find that a disproportionately large number of firms exceed their goals by a small margin as compared to the number that fall short of the goal by a similar margin. This asymmetry is particularly acute for earnings goals, when compensation is contingent on a single goal, when the pay-performance relationship around the goal is concave-shaped, and for grants with non-equity-based payouts. Firms that exceed their compensation target by a small margin are more likely to beat the target the next period and CEOs of firms that miss their targets are more likely to experience a forced turnover. Firms that just exceed their Earnings Per Share (EPS) goals have higher abnormal accruals and lower Research and Development (R&D) expenditures, and firms that just exceed their profit goals have lower Selling, General and Administrative (SG&A) expenditures. Overall, our results highlight some of the costs of linking managerial compensation to specific compensation targets.

Using data on over 57,000 low-income tax filers, we estimate the effect of Medicaid access on the propensity of households to save or repay debt from their tax refunds. We instrument for Medicaid access using variation in state eligibility rules. We find substanital heterogeneity across households in the savings response to Medicaid. Households that are not experiencing financial hardship behave in a manner consistent with a precautionary savings model, meaning they save less under Medicaid. In contrast, among households experiencing financial hardship, Medicaid eligibility increases refund savings rates by roughly 5 percentage points or $102. For both sets of households, effects are stronger in states with lower bankruptcy exemption limits—consistent with uninsured, financially constrained households using bankruptcy to manage health expenditure risk. Our results imply that expansions to the social safety net may affect the magnitude of the consumption response to tax rebates.