Bankruptcy Court Research Articles

Bankruptcy Reform and Breakthrough Innovation: Evidence from the Quasi-Experiment in China

Using the quasi-natural experiment of staggered bankruptcy court establishment across China, this study examines the impact of bankruptcy reform on corporate breakthrough innovation. Results show that bankruptcy courts significantly facilitate breakthrough innovation, with particularly pronounced effects among firms in high-tech industries and competitive sectors, firms with prior innovation advantages, and non-state-owned firms. Mechanism analysis reveals that bankruptcy courts boost the supply of credit resources, especially long-term credit, providing stable financial support for technological breakthroughs. Additionally, stronger legal protection promotes R&D alliances, fostering breakthrough innovation.

Does the establishment of bankruptcy courts affect the risk of corporate collapse?

Does the establishment of bankruptcy courts affect the risk of corporate collapse?

How bankruptcy system innovation affects firm investment behavior: A quasi-natural experiment based on the establishment of bankruptcy courts in China

This study investigates the effects of bankruptcy system innovation on firm investment behavior. Taking the establishment of bankruptcy courts in China as a quasi-natural experiment and using the difference-in-differences method, we show a significant positive relationship between the bankruptcy system and firm investment in financial assets. Improving creditor protection, increasing firms' financing constraints and costs, and increasing the bankruptcy reorganization rate are the main mechanisms through which the establishment of bankruptcy courts promotes firm investment in financial assets. Moreover, the effects of bankruptcy court establishment on firm investment in financial assets are more significant for non-state-owned firms, firms with CEOs who do not have a financial background, and firms in regions with better institutional environments. Finally, we find that the increased investment in financial assets by firms after the establishment of the bankruptcy court balances the efficiency of investment in financial assets at the same time. The findings of this study can provide a reference for optimizing the allocation of market resources and improving the financial rules of the legal system.

Recognising foreign solvent proceedings under the UNCITRAL Model Law on Cross-Border Insolvency: the Singaporean approach in Ascentra Holdings, Inc v SPGK Pte Ltd [2023] 2 SLR 421

To promote cooperation among stakeholders in different jurisdictions to facilitate coordinated insolvency proceedings, the United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Cross-Border Insolvency (MLCBI) in 1997. The MLCBI harmonises certain procedural aspects of the cross-border insolvency process, though states may choose to make modifications when adopting the MLCBI in their own legal systems. This was completed in Singapore in 2017, and the Singapore Model Law (SML) can now be found in the Third Schedule to the Insolvency, Restructuring and Dissolution Act 2018 (2020 Rev Ed) (IRDA 2018). One topic that has been the subject of much debate internationally is whether foreign solvent proceedings can be recognised under the MLCBI or the corresponding provisions in various jurisdictions: the Nevada Bankruptcy Court first answered this question in the affirmative, but this was explicitly rejected by the High Court of England and Wales (EWHC) in Re Sturgeon Central Asia Balanced Fund Ltd (in liquidation) (No 2) (Re Sturgeon). In Ascentra Holdings, Inc (in official liquidation) v SPGK Pte Ltd (Ascentra), the Singapore Court of Appeal (SGCA) held that foreign proceedings concerning solvent companies may be recognised under the SML. This commentary addresses the salient points of the SGCA's judgment and highlights the positive impact of this gradual harmonisation of the approaches taken in different jurisdictions to the MLCBI. Through a comparative analysis of the conflicting Re Sturgeon decision, three additional justifications based on the preparatory documents pertaining to the MLCBI, relevant authorities in the UK and a purposive reading of the MLCBI are provided for the approach in Ascentra. It is contended in closing that these reasons support the argument for definitively overruling the Re Sturgeon decision in the UK.

Unintended consequences of the introduction of specialized bankruptcy courts: evidence from zombie lending

We examine the economic consequences of the introduction of specialized bankruptcy courts (SBCs) from the perspective of zombie lending, using a sample of Chinese listed zombie firms in the 2016–2021 period. We find that the introduction of SBCs unexpectedly and significantly increases zombie lending, given the perverse incentives for banks and the intervention of local governments. The mechanism is that the introduction of SBCs improves the firms' bankruptcy efficiency, which increases the exposure probability of banks' bad loans and regional unemployment. To conceal these bad loans and unemployment, banks and local governments have to dramatically increase zombie lending. Thus, while better bankruptcy procedures are typically assumed to discourage zombie lending, we show that the introduction of SBCs may instead encourage such lending by exacerbating conflicts among creditors and political-economic frictions.

Judicial Waves, Ethical Shifts: Bankruptcy Courts and Corporate ESG Performance

Judicial Waves, Ethical Shifts: Bankruptcy Courts and Corporate ESG Performance

Judicial Waves, Ethical Shifts: Bankruptcy Courts and Corporate ESG Performance

Judicial Waves, Ethical Shifts: Bankruptcy Courts and Corporate ESG Performance

Bankruptcy law enforcement and corporate digital transformation: evidence from a quasi-natural experiment in China

ABSTRACT Digital transformation presents both opportunities and challenges for companies. However, there is little literature that investigates external factors affecting corporate digital transformation. This paper explores the impact of bankruptcy law enforcement on corporate digital transformation, using the introduction of bankruptcy courts in China as a quasi-natural experiment. Using the 2010–2019 data of Chinese A-share listed companies, we find that bankruptcy courts significantly increase digital transformation by 17.5%. The effects are driven by increased debt financing and reallocation of digital talent, and are more pronounced for firms reliant on external financing and in cities with more zombie firms. Our study highlights the importance of legal institutions in supporting digital initiatives and offers insights for policymakers and managers to drive digitalization. Future research could expand to SMEs and other influencing factors.

Double-edged sword: Does strong creditor protection in the bankruptcy process affect firm productivity

Using data from Chinese A-share listed firms from 2015 to 2022, a difference-in-differences model is employed to empirically examine the impact of bankruptcy regimes, marked by the establishment of the bankruptcy court, on firms' total factor productivity (TFP). The results show a significant decline in TFP among firms in regions following the establishment of the bankruptcy court. This result remains valid after a series of robustness tests. Mechanism tests reveal that bankruptcy court heightens firms' risk aversion by endowing excessive rights to creditors. Consequently, firms tend to downwardly adjust capital structure, curtail innovation investment, and accumulate liquid assets as coping measures, ultimately contributing to a decline in TFP. However, well-developed market mechanisms can alleviate the negative impact of bankruptcy court excessively protecting creditors. Specifically, when firms are located in regions with weak government intervention and strong financial development, as well as in market environments with low uncertainty and strong competition, this negative impact can be mitigated. Moreover, we find that under bankruptcy court operations, while a series of risk reduction measures taken by firms triggers a decline in TFP, it mitigates financial distress. These findings provide fresh insights into the dual nature of creditor protection and offer valuable references for governments to improve the bankruptcy legal system.

Debt on the Ground: The Scholarly Discourse of Bankruptcy and Financial Precarity

A rich literature uses law and social science methods to better understand household financial distress and overindebtedness both inside and outside of bankruptcy. This scholarship contributes to several ongoing scholarly conversations, such as those on income and wealth disparities across race and class, how people live in circumstances of financial precarity, why people turn to the legal system to solve their problems, and how to improve access to justice so people can get the help they need. We first review the current literature about who files bankruptcy, the contributors to people's need to file bankruptcy, what happens to them in bankruptcy court, and what happens after their bankruptcy cases conclude. We then outline a research agenda of low-hanging fruit that will contribute to broader sociological and sociolegal research agendas, including economic mobility, aging, gender studies, health studies, family studies, social psychology, and policy work.

Bankruptcy judicial reform and corporate trade credit financing

In this paper, we rely on an exogenous shock to examine the impact of bankruptcy judicial reform on firms' trade credit financing. We employ a staggered difference-in-differences design based on the introduction of bankruptcy courts in China and find that the implementation of bankruptcy judicial reform significantly reduces firms' trade credit financing. Mechanism tests reveal that improved judicial efficiency increases the risk perception of local firms, which discourages trade credit financing. Heterogeneity tests show that the above effect is more pronounced in firms with higher bankruptcy risks, firms with state ownership, and in regions where bankruptcy administrators have been established. Conversely, higher supplier concentration attenuates the inhibitory effect of bankruptcy judicial reform. Further analyses show that the reform mainly reduces firms' trade credit provided by customers and the trade credit with financial attributes. In addition, the reform lowers the sales of firms' suppliers but does not affect their earnings performance, while customers benefit from the reform as their earnings increase while sales do not change significantly. The findings of this paper shed light on the impact of bankruptcy judicial efficiency on corporate financing structure, and provide policy implications for promoting the construction of China's bankruptcy rule of law and preventing financial risks.

Bankruptcy Resolution: Misery or Strategy

Contrary to conventional wisdom, this study reports a positive relationship between large US firms' leverage levels and their likelihood of emerging from Chapter 11 bankruptcy. In anticipation of a favourable court outcome, which allows them to emerge from bankruptcy with reduced debt, firms tend to increase their leverage levels in the years preceding the bankruptcy filing year. This suggests strategic abuse of bankruptcy courts and creditors. Test results suggest that firms start acting strategically up to four years before filing for bankruptcy so that they can emerge with a reduced debt burden at the cost of creditors. Additionally, our study also contributes to the corporate bankruptcy literature by exploring a set of factors (related to the firm, judicial, case, geographic, and macroeconomic characteristics) explaining the likelihood of firms emerging from bankruptcy, and proposing a parsimonious multivariate model that best predicts the likelihood of surviving Chapter 11 bankruptcy.

Silicon Valley Bank's Multibillion-Dollar Tax Battle in Bankruptcy Court

Silicon Valley Bank's Multibillion-Dollar Tax Battle in Bankruptcy Court

From Courtrooms to Corporations: The Effect of Bankruptcy Court Establishment on Firm Acquisitions

From Courtrooms to Corporations: The Effect of Bankruptcy Court Establishment on Firm Acquisitions

Bankruptcy court establishment and corporate risk-taking

This study examines the influence of bankruptcy courts on the risk-taking behavior of listed firms in China between 2002 and 2019. The establishment of bankruptcy courts discourages listed firms from taking excessive risk. This effect is more pronounced in firms with financing constraints, high market valuations, and those operating in regions with a weaker rule of law. Overall, our findings indicate that establishing bankruptcy courts benefits creditors’ rights and restrains corporate risk-taking.

Bankruptcy in groups

AbstractWe examine bankruptcy within business groups. Groups have incentives to support financially distressed subsidiaries, as the bankruptcy of a subsidiary may impose severe costs on the group as a whole. This is in part because, in several countries, bankruptcy courts often “pierce the corporate veil” and hold groups liable for their distressed subsidiaries’ obligations as if they were their own. Using a large cross-country sample of group-affiliated firms, we show that, by reallocating resources within the corporate structure, business groups actively manage intra-group credit risk to prevent costly within-group insolvencies. Moreover, we document that recent regulatory changes in the approval and disclosure of related party transactions are costly for business groups in that they constrain their ability to shield their subsidiaries from credit-risk shocks. Our study informs the current regulatory debate on related party transactions by highlighting an important cost of anti-self-dealing regulation.

Creditor protection and trade credit financing: Evidence from a quasi-natural experiment in China

Based on the listed firms in China's A-share stock market from 2012 to 2021, we investigate the relationship between the introduction of bankruptcy courts and trade credit financing. The empirical results show that firms obtain more trade credit after the introduction of bankruptcy courts in their location. This finding is robust to a series of endogeneity and robustness checks. We further find that the effect of bankruptcy courts on trade credit financing is more pronounced when the firm has a greater distance from its suppliers and higher financial distress. Overall, our findings show the positive effect of the introduction of bankruptcy courts and have important implications for policymakers in emerging markets.

Speed for Safety: The Establishment of Bankruptcy Courts and Bank Credit Risk in China

Abstract We investigate the effect of bankruptcy court establishment on the credit risk of municipal commercial banks in China from 2013 to 2020. Establishing bankruptcy courts reduces the non-performing loan ratio of municipal commercial banks. The effect is more pronounced in cities with low fiscal transparency and market fragmentation, and a strong rule of law. Furthermore, we argue that the bank’s loan provision and provision coverage ratio is the crucial intermediate variable in the relationship between bankruptcy court establishment and credit risk management. Our findings demonstrate the critical role of judicial system reform in promoting financial stability in China. JEL classification numbers: G21, G32, G33. Keywords: Bankruptcy court, Credit risk, Judicial reform.

Municipal bankruptcies and crime

While the importance of municipal bonds for the provision of public services is well-documented, the consequences of municipal bankruptcies remain understudied. We contribute to this literature by studying the effects of municipal bankruptcies on crime. Using the staggered difference-in-differences approach and agency-level crime data, we find that violent and property crime rates rise after successful (approved by the bankruptcy courts) Chapter 9 bankruptcy filings. The association between successful municipal bankruptcy and crime remains robust to alternative estimation methods, including a novel empirical technique that allows for the treatment effect heterogeneity and dynamics, and several robustness checks and falsification exercises. Our exploratory evidence suggests that the rise in crime rates is due to lower public safety expenditures. Our findings highlight the importance of efficient financial management for local government entities and the need for particular attention to law and order in the local jurisdiction going through bankruptcy.

The Need for Dignitary Justice for Tort Creditors in Chapter 11 Bankruptcy

With increased frequency, mass tortfeasors are turning to Chapter 11 to address their liabilities, dragging enormous numbers of tort victims into bankruptcy court with them. These individuals deserve fair and dignified treatment. Indeed, if we care about people’s experiences within, and the public’s trust in, the bankruptcy courts, such treatment is essential. Yet contemporary corporate bankruptcy law and literature leave little room for dignitary concerns. This Note aims to highlight the system’s shortcomings and suggest low-cost interventions which would restore dignity to tort creditors.