Bankruptcy courts and capital structures

Efficient and independent bankruptcy courts play a pivotal role in shaping corporate strategies and fostering economic growth. In this study, we exploit the establishment of specialized bankruptcy courts in China as a quasi-natural experiment to investigate how enhancements in bankruptcy efficiency influence corporate capital structures. An analysis of a dataset of 11,881 observations from China’s A-share listed firms between 2015 and 2023 reveals that the establishment of bankruptcy courts significantly increases corporate leverage. The impact is particularly pronounced among firms with higher asset tangibility, a larger size, and greater state ownership. Additionally, this study identifies a stronger effect of bankruptcy courts on long-term debt than on short-term debt. These results enhance the understanding of the multifaceted effects of bankruptcy court reforms on corporate leverage and are largely consistent with the trade-off theory of capital structure.