Are Russian commercial courts biased? Evidence from a bankruptcy law transplant

Abstract

We study the nature of judicial bias in bankruptcy proceedings following the enactment of the 1998 bankruptcy law in Russia. The two main findings are as follows. First, regional political characteristics affected judicial decisions about the number and types of bankruptcy proceedings initiated after the law took effect. Controlling for indicators of firms' insolvency and the quality of the regional judiciary, reorganization procedures were significantly more frequent in regions with politically popular governors and governors who had hostile relations with the federal center. Poor judicial quality was also associated with higher incidence of reorganizations. Second, the quality of the regional judiciary affected performance of firms under the reorganization procedure: in regions with low quality judges, firms that were reorganized according to the 1998 law had significantly lower growth in sales, labor productivity, and product variety compared to firms not subject to bankruptcy proceedings. In contrast, in regions with high quality judges, firms in reorganization outperformed firms not in bankruptcy proceedings. This effect of judicial quality on the performance of reorganized firms was stronger when governors were politically popular. These findings are consistent with the view that politically strong governors subverted enforcement of the 1998 bankruptcy law. Journal of Comparative Economics 35 (2) (2007) 254–277.