Breaking barriers to employment: the real effects of bankruptcy reform in China

This study investigates the employment effects of strengthened court enforcement in China’s bankruptcy system. Exploiting the staggered establishment of specialized bankruptcy tribunals as a quasi-natural experiment, we apply a difference-in-differences approach to data from A-share listed firms from 2010 to 2022. The results show that the reform significantly raises corporate employment, with stronger effects for firms facing tighter financial constraints, holding greater collateral assets, and operating in provinces with stronger judicial environments. Mechanism analysis suggests that court specialization is associated with more active bankruptcy enforcement and is consistent with improved access to external finance, a shift toward longer-term debt, and the release and reallocation of resources from zombie firms. At the macro level, city-level analysis confirms that overall employment increases, implying positive spillovers for local labor markets through improved resource reallocation. Together, the findings underscore the importance of judicial capacity in shaping labor demand and resource allocation in emerging economies.