Judicial independence and corporate financialization: Evidence from China

Abstract

This study employs China's establishment of circuit tribunals (CCT) to explore how enhanced judicial quality affects corporate financialization. Using a sample of Chinese A-share listed firms from 2007 to 2019, we reveal a 16.37 % decline in corporate financialization due to CCT. Mechanism analysis reveals that this effect operates through a decreased perception of economic policy uncertainty, improved access to external financing, and reduced non-productive expenditures. Consistent with these paths, heterogeneity analyses further demonstrate that the link between CCT and financialization is stronger among private firms, small and medium-sized enterprises (SMEs), and firms without political connections. The disaggregated results show that CCT primarily reduces the highly liquid and high-yield financial investments. Additionally, our results indicate that improved judicial quality can mitigate corporate over-financialization. The reduced financial investments will shift toward physical and R&D investments, enhancing product market performance and firm value. Our findings contribute a new perspective on the factors influencing corporate financialization and offer valuable recommendations for policymakers seeking to foster real economic growth by enhancing judicial quality.