Abstract
•Strong financial regulation has policy effect on the bankruptcy risk in China and a difference-in-differences (DID) is applied.•Strong financial regulation significantly decreases corporate bankruptcy risk.•Reduction in corporate financialization and improvement in corporate liquidity serve as underlying mechanisms.
This paper employs a difference-in-differences (DID) design to examine how strong financial regulation affects the bankruptcy risk of firms in China. Our research suggests that strong financial regulation significantly decreases corporate bankruptcy risk. The baseline conclusion withstands various robustness tests, ensuring its validity. Further analysis indicates that the reduction in corporate financialization and improvement in corporate liquidity serve as underlying mechanisms. This study promotes the theoretical and empirical understanding of the link between strong financial regulation and corporate risk.