The Value of Bankruptcy Court in Financial Distress: Evidence from Chinese Bond Market

This paper investigates the consequences of bankruptcy reform on creditor protection and credit market development in China amidst rising credit market defaults. We find that the introduction of specialized bankruptcy courts, characterized by better-trained judges and reduced government interference, reduces the cost of bond financing by approximately 10%, with a stronger effect on bonds with higher ex ante default risk.By exploring detailed bankruptcy filings associated with bond defaults, we identify that specialized courts enhance creditor protection by increasing bondholders’ recovery values, expediting bankruptcy proceeding and improving judicial independence. A back-of-the-envelope calculation indicates potential annual interest savings of 2.4 billion dollars for Chinese corporate bond issuers.