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Judicial independence and crash risk: Evidence from a natural experiment in China

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  • Liu, Yurou

Abstract

This paper examines the impact of judicial independence on stock price crash risk. Employing the establishment of circuit tribunals in China as a shock to judicial independence and a difference-in-differences design, I find that increased judicial independence is associated with lower stock price crash risk. Further analysis suggests that timely disclosure of bad news is a potential mechanism through which judicial independence affects stock price crash risk. Cross-sectional tests indicate that the negative relationship between judicial independence and crash risk is more pronounced for firms located in areas with higher levels of local protectionism, firms with a stronger incentive to hoard more bad news, and firms with weaker external monitoring prior to the circuit tribunal implementation. Taken together, my findings suggest that judicial independence plays a disciplinary role in mitigating firms' bad-news-hoarding activities.

Suggested Citation

  • Liu, Yurou, 2023. "Judicial independence and crash risk: Evidence from a natural experiment in China," Journal of Corporate Finance, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:corfin:v:83:y:2023:i:c:s0929119923001396
    DOI: 10.1016/j.jcorpfin.2023.102490
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    More about this item

    Keywords

    Judicial independence; Circuit court; Crash risk; Legal environment;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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