Can the Establishment of Bankruptcy Courts Improve Firm Investment Efficiency? Evidence from China

Abstract This paper examines the impact of the establishment of bankruptcy courts on firms' investment efficiency in China. The results show that the establishment of bankruptcy courts significantly enhances the investment efficiency of local firms. We identify the trust effect and the deterrence effect as the key mechanisms through which bankruptcy courts improve investment efficiency. The impact is particularly pronounced in firms located in better legal environments, among privately owned firms, and within firms characterized by lower internal control quality. These findings provide novel evidence on the economic consequences of judicial reform.