Reducing financial distress through digital institutional reform: Evidence from China's business environment pilot

This paper examines the effect of digitally enabled business environment reform on corporate financial distress in China. Exploiting a quasi-natural experiment arising from the 2021 national pilot program for business environment innovation, we implement a difference-in-differences (DiD) strategy using panel data on A-share non-financial listed firms from 2018 to 2024. Corporate financial health is assessed through the Altman Z-score and firm leverage. Empirical results demonstrate that the reform significantly alleviates financial distress, as evidenced by increased Z-scores and decreased leverage ratios. These findings remain robust across a variety of tests, including placebo regressions, alternative fixed effects, subsample tests, and clustering schemes. Further analysis reveals that the improvement in firms' financial health is partially mediated by enhanced information transparency, with greater media exposure facilitating more efficient financing conditions. The effect of the reform is also found to be more pronounced for firms facing greater financial constraints, such as smaller and younger enterprises, suggesting that institutional improvements help ease external financing barriers. Meanwhile, increased market competition induced by the reform has heterogeneous consequences, with state-owned enterprises experiencing a weaker or even adverse impact. Additionally, firms with stronger innovation capacity—proxied by higher R&D intensity—tend to benefit more from the reform, indicating that digital and institutional upgrading jointly enhance firm resilience. This study contributes to the literature on financial distress, institutional reform, and digital governance by providing novel evidence on how reforms that combine regulatory streamlining with digital empowerment can strengthen firm-level stability. The findings offer important policy implications for emerging markets seeking to optimize resource allocation and reduce financial vulnerability through business environment modernization.