Going Bankrupt in China
32 Pages Posted: 21 Sep 2018 Last revised: 24 Nov 2018
Date Written: September 17, 2018
This paper investigates how legal reforms affect credit markets by studying the introduction of courts specialized in bankruptcy in China. We construct a new case-level dataset on corporate bankruptcy filings and exploit the staggered introduction of specialized courts across Chinese provinces. Specialized courts are run by bankruptcy professionals that are less likely to be under the influence of local governments. We find that provinces that introduced specialized courts experienced an increase in liquidations of state-owned firms, faster resolution of SOE-related cases, and a decrease in the share of zombie firms (low productivity firms kept in business by preferential credit lines). State-owned firms operating under specialized courts experienced a decrease in the size of new bank loans, lower access to new loans, and lower investment in physical capital. These results highlight how limiting government intervention can fasten insolvency resolution, and have important policy implications in light of the recent increase in insolvency that followed China's debt boom.
Keywords: Financial Distress, Local Government, Court Efficiency
JEL Classification: G33, G34, K22
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