Judicial Effectiveness and Cost of Debt: Evidence From A Quasi-Natural Experiment in China*

This paper utilizes the implementation of circuit courts in China to identify a causal relationship between judicial effectiveness and corporate debt financing costs. We provide firm-level evidence demonstrating that enhanced judicial effectiveness leads to lower debt costs, with reduced credit discrimination and improved contract enforcement being key mechanisms. Further analyses reveal that the impact of judicial effectiveness on debt costs is more pronounced for firms that initially experienced higher levels of credit discrimination, and firms with lower credit quality, weaker collateral capacity, and higher reliance on bonds. We also find that improved judicial enforcement increases firms' total loans and credit loans, while reducing collateral loans. Additionally, firms reduce operating expenses to strengthen their financial condition and increase R&D investment after securing more debt at lower costs. This paper offers novel evidence highlighting the critical role of judicial reform in shaping the debt market.