Bankruptcy court establishment and corporate financial fraud

Abstract

Against the backdrop of accelerating economic globalization and the rule of law, the establishment of bankruptcy courts, as an important part of judicial reform, has had a profound impact on corporate behavior, particularly financial fraud. This study utilizes microdata from Chinese listed companies from 2010 to 2022, along with macrodata from 287 prefecture-level cities, to systematically analyze the impact of bankruptcy court establishment on corporate financial fraud. The study indicates that the establishment of bankruptcy courts markedly lowers the likelihood of corporate financial fraud and diminishes its occurrence. This impact exhibits substantial variation across firms with differing audit qualities and ownership configurations. Furthermore, the quality of information disclosure plays a mediating role between the establishment of bankruptcy courts and corporate financial fraud, exhibiting heterogeneity between state-owned and private enterprises. Additionally, the level of regional rule of law moderates the effect of bankruptcy court establishment in curbing corporate financial fraud; that is, the higher the regional rule of law, the more pronounced the suppressive effect of bankruptcy court establishment on corporate financial fraud.