Going Bankrupt in China

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 cases filed in provinces that introduced specialized courts are assigned to more experienced, better trained judges, and reach resolution faster when it comes to insolvent state-owned firms. Provinces that introduced specialized courts experienced an increase in liquidations of state-owned firms and a decrease in the overall share of “zombie” 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 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