Judicial efficiency and bankruptcy filing decisions

Using administrative data on Italian firms and courts, this paper studies whether judicial inefficiency influences the likelihood and timing of bankruptcy filings. To address endogeneity, we instrument court efficiency with judge turnover. We find that inefficient courts significantly reduce the likelihood that financially distressed firms file for bankruptcy. Judicial inefficiency also substantially delays bankruptcy filing: firms remain insolvent longer and are more likely to enter bankruptcy after extended periods of economic distress, contributing to the persistence of insolvent and zombie firms, with adverse implications for resource reallocation.