We construct the most comprehensive bankruptcy database of Chinese firms to date and document significant real effects arising from the establishment of specialized bankruptcy courts. Specifically, the recovery rate for unsecured creditors increases by 38.6 percentage points after the reform. This improvement is not driven by shorter case durations or lower direct bankruptcy costs, as intuition might suggest. Instead, it results primarily from greater efficiency in the discovery and disposal of assets during bankruptcy proceedings. The reform also increases the likelihood of reorganization and promotes capital infusion in such cases. Higher recovery rates generate broader spillovers: reductions in non-performing loans, expansion of unsecured lending by local banks, relaxation of firms’ financial constraints, shifts in capital structure and investment, and greater public willingness to file for bankruptcy when distressed.

Using data from Chinese A-share listed firms from 2015 to 2022, we employ a difference-in-differences model to empirically examine the impact of bankruptcy regimes, marked by the establishment of bankruptcy courts, on firms’ total factor productivity (TFP). The results show a significant decline in TFP among firms in regions following the establishment of bankruptcy courts. This finding remains valid after a series of robustness tests. Mechanism tests reveal that establishing bankruptcy courts increases firms’ risk aversion incentives by endowing creditors with excessive rights. Consequently, firms tend to reduce liabilities, curtail R&D investment, and accumulate liquid assets as coping measures, ultimately contributing to a decline in TFP. Furthermore, this effect is more pronounced for firms with high financial risk. However, the improvement of the market mechanism can alleviate the negative impact of bankruptcy courts excessively strengthening creditor protection. 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. These findings provide fresh insights into the dual nature of creditor protection and offer valuable references for governments to improve the bankruptcy legal system.

Using data from Chinese A-share listed firms from 2015 to 2022, we employ a difference-indifferences model to empirically examine the impact of bankruptcy regimes, marked by the establishment of bankruptcy courts, on firms’ total factor productivity (TFP). The results show a significant decline in TFP among firms in regions following the establishment of bankruptcy courts. This finding remains valid after a series of robustness tests. Mechanism tests reveal that establishing bankruptcy courts increases firms’ risk aversion incentives by endowing creditors with excessive rights. Consequently, firms tend to reduce liabilities, curtail R&D investment, and accumulate liquid assets as coping measures, ultimately contributing to a decline in TFP. Furthermore, this effect is more pronounced for firms with high financial risk. However, the improvement of the market mechanism can alleviate the negative impact of bankruptcy courts excessively strengthening creditor protection. 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. These findings provide fresh insights into the dual nature of creditor protection and offer valuable references for governments to improve the bankruptcy legal system.