Unintended consequences of the introduction of specialized bankruptcy courts: evidence from zombie lending

Chun Liu, Shilin Liang and Liang Sun

International Review of Financial Analysis, 2024, vol. 96, issue PB

Abstract: We examine the economic consequences of the introduction of specialized bankruptcy courts (SBCs) from the perspective of zombie lending, using a sample of Chinese listed zombie firms in the 2016–2021 period. We find that the introduction of SBCs unexpectedly and significantly increases zombie lending, given the perverse incentives for banks and the intervention of local governments. The mechanism is that the introduction of SBCs improves the firms' bankruptcy efficiency, which increases the exposure probability of banks' bad loans and regional unemployment. To conceal these bad loans and unemployment, banks and local governments have to dramatically increase zombie lending. Thus, while better bankruptcy procedures are typically assumed to discourage zombie lending, we show that the introduction of SBCs may instead encourage such lending by exacerbating conflicts among creditors and political-economic frictions.

Keywords: Specialized bankruptcy courts; Zombie lending; Perverse incentives for banks; Local government intervention (search for similar items in EconPapers)
JEL-codes: G18 G33 G38 K22 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521924006276
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006276

DOI: 10.1016/j.irfa.2024.103695

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().