Bankruptcy courts and the marketization of bond issuance

Abstract

PurposeThis paper aims to study the effect of the establishment of bankruptcy courts on bond issuance market. This paper helps to predict that the introduction of bankruptcy courts in China can mitigate price distortions caused by the implicit government guarantees and promote the development of the high-risk bond market.Design/methodology/approachThis paper exploits the staggered introduction of bankruptcy courts across cities to implement a differences-in-differences strategy on bond issuance data. Using bonds issued in China between 2018 and 2020, the impact of bankruptcy courts on the bond issuance market can be analyzed.FindingsThis paper reveals that bond issuance credit spreads increase and is more sensitive to firm size, profitability and downside risk of issuance entity after the introduction of bankruptcy courts. It also reveals a substantive increase in bond issuance quantity and a decrease in issuer credit ratings following the establishment of bankruptcy courts. In addition, the increase of credit spreads is more prominent for publicly traded bonds, those whose issuers located in provinces with lower judicial confidence, bonds issued by SOEs and bonds with stronger government guarantees. Finally, the role of bankruptcy courts is more pronounced in regions with higher marketization.Originality/valueThis paper relates to previous studies that investigate the impact of laws and institutions on external financing. It helps provide new evidence to this literature on how improvements of efficiency and quality in bankruptcy enforcements relate to the marketization of bond issuance. The results provide further evidence on legal institutions and bond financing.