Establishment of bankruptcy courts and corporate investment decisions

Abstract

In recent years, with the ongoing enhancement of China's bankruptcy legal system, the establishment of bankruptcy courts (EBC) has emerged as a crucial initiative to optimize the business environment and boost judicial efficiency. Nevertheless, the influence of EBC on corporate investment decisions, particularly regarding their underlying mechanisms and heterogeneous effects, remains insufficiently explored. This study, utilizing data from publicly listed companies spanning from 2010 to 2023, delves into the impact of bankruptcy court establishment on corporate investment decisions and elucidates its underlying mechanisms. The findings reveal that the EBC significantly stimulates corporate investment, with this effect exhibiting marked heterogeneity among firms with different ownership structures and across various regions. Mechanism analysis further suggests that EBC positively affects corporate investment decisions by mitigating financing constraints. Notably, the mediating effect of financing constraints is more prominent in highly competitive firms. Additionally, the debt-to-asset ratio serves as a threshold in this relationship, with the impact of bankruptcy court establishment on corporate investment decisions following a U-shaped trend, initially decreasing and subsequently increasing as the debt-to-asset ratio varies.