Going Bankrupt in China

31 Pages Posted: 21 Sep 2018 Last revised: 7 Mar 2019

Date Written: March 4, 2019

Abstract

This paper investigates how legal reforms affect judicial outcomes and 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 cities. Specialized courts are run by bankruptcy professionals that are less likely to be under the influence of local governments. We find that cases filed in cities that introduced specialized courts are assigned to more experienced, better trained judges, and reach resolution faster. Specialization increases the number of bankruptcy filings and the share of state-owned firms filing for bankruptcy. Cities that introduced specialized courts experienced a decrease in the share of ``zombie'' firms and an increase in average product of capital of local firms. 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 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

Suggested Citation

Li, Bo and Ponticelli, Jacopo, Going Bankrupt in China (March 4, 2019). Available at SSRN: https://ssrn.com/abstract=3251570 or http://dx.doi.org/10.2139/ssrn.3251570

Bo Li

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China
+86 10-627982146 (Phone)

Jacopo Ponticelli (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Dr
Evanston, IL 60208
United States

HOME PAGE: http://https://www.kellogg.northwestern.edu/faculty/ponticelli/index.html

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