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

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  • Liu, Chun
  • Liang, Shilin
  • Sun, Liang
Abstract
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.

Suggested Citation

  • Liu, Chun & Liang, Shilin & Sun, Liang, 2024. "Unintended consequences of the introduction of specialized bankruptcy courts: evidence from zombie lending," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    • Handle: RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006276
    DOI: 10.1016/j.irfa.2024.103695
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    References listed on IDEAS

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    More about this item

    Keywords

    Specialized bankruptcy courts; Zombie lending; Perverse incentives for banks; Local government intervention;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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