Going Bankrupt in China

Abstract

Using a new case-level dataset we document a set of stylized facts on bankruptcy in China and study how the staggered introduction of specialized courts across Chinese cities affects insolvency resolution and the local economy. For identification, we compare bankruptcy cases handled by specialized versus traditional civil courts within the same city and filed in the same year. We find that specialized courts decrease case duration by 36% relative to traditional civil courts. We provide evidence consistent with court specialization increasing efficiency via selection of better trained judges and higher judicial independence from local politicians. We document that cities introducing specialized courts experience a relative reallocation of employment out of zombie-firms-intensive sectors, as well as faster firm entry and a larger increase in average capital productivity.

Keywords: Court efficiency, Political influence, Specialized Courts, Zombie firms

JEL Classification: G33, K22, O16