Every coin has two sides: Does bankruptcy judicial reform promote corporate innovation༟

Abstract

This paper studies how bankruptcy judicial reform affects corporate innovation. Using data from Chinese firms from 2015 to 2023, we find that the staggered establishment of bankruptcy courts promotes corporate innovation. The channel analysis reveals that the establishment of bankruptcy courts significantly enhances the specialization and efficiency of bankruptcy case trials, strengthens creditor protection, and improves creditors’ financing support for firms, thereby promoting corporate innovation. Furthermore, the establishment of bankruptcy courts has encouraged greater corporate risk-taking, making firms more inclined to invest funds in innovative activities. The positive impact of bankruptcy judicial reform on innovation are more pronounced for small and medium-sized enterprises (SMEs), high-tech firms, firms with limited collateral, and those with lower bankruptcy risk. This study offers empirical evidence of the crucial role of the legal system in driving economic growth at the micro level.