An Analysis of the Bankruptcy Reorganization Procedure in China

This paper analyzes the reorganization procedure introduced into the Chinese bankruptcy system in 2007. It shows that managers devote more effort during the reorganization than before the bankruptcy when the emergence value of the bankrupt firm is substantial. In addition, in the pre-bankruptcy period, managers were shown to input less effort under the new law than under the old law. Finally, the paper demonstrates that the market interest rate under the new bankruptcy law is not necessarily lower than that under the old law. These results call attention to the potential costs of the reorganization procedure.