Judicial Independence and US State Bond Ratings: An Empirical Investigation

Abstract

Significant research has assessed how judicial independence influences a number of economic outcomes, however less has been done to evaluate how financial institutions perceive an independent judiciary. Therefore, this paper considers how greater judicial independence across US states may affect government bond ratings. Overall, the results would suggest that states with relatively more independent judiciaries do in fact have higher bond ratings, which translates into lower borrowing costs. The results are robust to a number of specifications and suggest the role that an independent judiciary plays in contract enforcement along with several other important implications for future research.