IDEAS home Printed from https://ideas.repec.org/a/sae/ausman/v51y2026i1p174-210.html

Justice’s financial footprint: Judicial independence and the cost of debt

Author

Listed:
  • Zhiwu Chen

    (School of Finance, Guangdong University of Foreign Studies, Guangzhou, China; Department of Accounting, University of Technology Sydney, Sydney, NSW, Australia)

  • Yan Chen

    (UTS Business School, University of Technology Sydney, Sydney, NSW, Australia)

  • Yan Han

    (Department of Economics, Beijing Institute of Technology, Beijing, China)

  • Meiting Lu

    (Macquarie Business School, Macquarie University, Sydney NSW, Australia)

  • Yaowen Shan

    (UTS Business School, University of Technology Sydney, Sydney, NSW, Australia)

Abstract

Exploiting the quasi-natural experiment of establishing district courts in China, we find that the enhanced judicial independence that has followed the circuit court reform significantly reduces the cost of debt financing. The reduction is driven by the alleviation of local protectionism and enhanced judicial efficiency, both of which strengthen the credibility and enforceability of contracts. The impact is more pronounced for firms that have non-political executives, high default and litigation risks, and weak market power. Further analyses reveal increased loan supply and improved credit quality for financially constrained firms post-reform, contributing to regional economic growth. This research enriches the discourse on judicial independence and financial development by demonstrating the pathways through which legal reforms enhance the accessibility and cost-effectiveness of external finance in emerging markets. JEL: H11, H25, H30

Suggested Citation

  • Zhiwu Chen & Yan Chen & Yan Han & Meiting Lu & Yaowen Shan, 2026. "Justice’s financial footprint: Judicial independence and the cost of debt," Australian Journal of Management, Australian School of Business, vol. 51(1), pages 174-210, February.
    • Handle: RePEc:sae:ausman:v:51:y:2026:i:1:p:174-210
    DOI: 10.1177/03128962241312718
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/03128962241312718
    Download Restriction: no
    File URL: https://libkey.io/10.1177/03128962241312718?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Li, Bin & Liang, Yilan & Shahab, Yasir & Gull, Ammar Ali & Ashraf, Naeem, 2022. "Parent-subsidiary dispersion, cost of debt and debt default: Evidence from China," Economic Modelling, Elsevier, vol. 107(C).
    2. Kee‐Hong Bae & Vidhan K. Goyal, 2009. "Creditor Rights, Enforcement, and Bank Loans," Journal of Finance, American Finance Association, vol. 64(2), pages 823-860, April.
    3. Klock, Mark S. & Mansi, Sattar A. & Maxwell, William F., 2005. "Does Corporate Governance Matter to Bondholders?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(4), pages 693-719, December.
    4. Anna Bergman Brown, 2016. "Institutional Differences and International Private Debt Markets: A Test Using Mandatory IFRS Adoption," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 54(3), pages 679-723, June.
    5. Anderson, Ronald C. & Mansi, Sattar A. & Reeb, David M., 2004. "Board characteristics, accounting report integrity, and the cost of debt," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 315-342, September.
    6. Lai, Shaojie & Yang, Laifeng & Wang, Qing & Anderson, Hamish D., 2023. "Judicial independence and corporate innovation: Evidence from the establishment of circuit courts," Journal of Corporate Finance, Elsevier, vol. 80(C).
    7. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    8. Bliss, Mark A. & Gul, Ferdinand A., 2012. "Political connection and cost of debt: Some Malaysian evidence," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1520-1527.
    9. Boubakri, Narjess & Ghouma, Hatem, 2010. "Control/ownership structure, creditor rights protection, and the cost of debt financing: International evidence," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2481-2499, October.
    10. Yang, Laifeng & Wang, Qing Sophie & Lai, Shaojie, 2023. "Fair and square: The impact of judicial independence on entrepreneurship," Finance Research Letters, Elsevier, vol. 55(PB).
    11. Kirill Borusyak & Xavier Jaravel & Jann Spiess, 2024. "Revisiting Event-Study Designs: Robust and Efficient Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(6), pages 3253-3285.
    12. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    13. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    14. Pittman, Jeffrey A. & Fortin, Steve, 2004. "Auditor choice and the cost of debt capital for newly public firms," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 113-136, February.
    15. Dang, Man & Puwanenthiren, Premkanth & Jones, Edward & Nguyen, Thieu Quang & Vo, Xuan Vinh & Nadarajah, Sivathaasan, 2022. "Strategic archetypes, credit ratings, and cost of debt," Economic Modelling, Elsevier, vol. 114(C).
    16. Zeren Li & Zeyuan Wang, 2023. "Judicial recentralization as political control: Evidence from the judicial leader rotation in China," Social Science Quarterly, Southwestern Social Science Association, vol. 104(4), pages 669-683, July.
    17. Gao, Mingze & Leung, Henry & Qiu, Buhui, 2021. "Organization capital and executive performance incentives," Journal of Banking & Finance, Elsevier, vol. 123(C).
    18. Yan-Shing Chen & Chung-Hua Shen & Chih-Yung Lin, 2014. "The Benefits of Political Connection: Evidence from Individual Bank-Loan Contracts," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(3), pages 287-305, June.
    19. Araujo, Aloisio P. & Ferreira, Rafael V.X. & Funchal, Bruno, 2012. "The Brazilian bankruptcy law experience," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 994-1004.
    20. Campbell, Travis & Rodgers, Yana van der Meulen, 2023. "Conversion therapy, suicidality, and running away: An analysis of transgender youth in the U.S," Journal of Health Economics, Elsevier, vol. 89(C).
    21. Sun, Liyang & Abraham, Sarah, 2021. "Estimating dynamic treatment effects in event studies with heterogeneous treatment effects," Journal of Econometrics, Elsevier, vol. 225(2), pages 175-199.
    22. Lu, Zhengfei & Zhu, Jigao & Zhang, Weining, 2012. "Bank discrimination, holding bank ownership, and economic consequences: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 341-354.
    23. Ni, Xiaoran & Yin, Sirui, 2018. "Shareholder litigation rights and the cost of debt: Evidence from derivative lawsuits," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 169-186.
    24. Levine, Ross, 1998. "The Legal Environment, Banks, and Long-Run Economic Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 596-613, August.
    25. Paige Fields, L. & Fraser, Donald R. & Subrahmanyam, Avanidhar, 2012. "Board quality and the cost of debt capital: The case of bank loans," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1536-1547.
    26. Baker, Andrew C. & Larcker, David F. & Wang, Charles C.Y., 2022. "How much should we trust staggered difference-in-differences estimates?," Journal of Financial Economics, Elsevier, vol. 144(2), pages 370-395.
    27. Zhao, Da & Yu, Ao & Guo, Jingyuan, 2022. "Judicial institutions, local protection and market segmentation: Evidence from the establishment of interprovincial circuit tribunals in China," China Economic Review, Elsevier, vol. 75(C).
    28. Goodman-Bacon, Andrew, 2021. "Difference-in-differences with variation in treatment timing," Journal of Econometrics, Elsevier, vol. 225(2), pages 254-277.
    29. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    30. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2011. "Analyst forecast characteristics and the cost of debt," Review of Accounting Studies, Springer, vol. 16(1), pages 116-142, March.
    31. Doruk Cengiz & Arindrajit Dube & Attila Lindner & Ben Zipperer, 2019. "The Effect of Minimum Wages on Low-Wage Jobs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(3), pages 1405-1454.
    32. Radhakrishnan Gopalan & Abhiroop Mukherjee & Manpreet Singh, 2016. "Do Debt Contract Enforcement Costs Affect Financing and Asset Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2774-2813.
    33. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    34. Bradley, Michael & Chen, Dong, 2011. "Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 83-107, February.
    35. Eric C Ip & Kelvin Hiu Fai Kwok, 2017. "JUDICIAL CONTROL OF LOCAL PROTECTIONISM IN CHINA: ANTITRUST ENFORCEMENT AGAINST ADMINISTRATIVE MONOPOLY ON THE SUPREME PEOPLE's COURT," Journal of Competition Law and Economics, Oxford University Press, vol. 13(3), pages 549-575.
    36. Samuel B. Bonsall & Brian P. Miller, 2017. "The impact of narrative disclosure readability on bond ratings and the cost of debt," Review of Accounting Studies, Springer, vol. 22(2), pages 608-643, June.
    37. Panle Jia Barwick & Shengmao Cao & Shanjun Li, 2021. "Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market," American Economic Journal: Economic Policy, American Economic Association, vol. 13(4), pages 112-151, November.
    38. James R. Brown & J. Anthony Cookson & Rawley Z. Heimer, 2017. "Law and Finance Matter: Lessons from Externally Imposed Courts," The Review of Financial Studies, Society for Financial Studies, vol. 30(3), pages 1019-1051.
    39. Wu, Ying & Zhang, Yi & Li, Guangzi & Li, Fang, 2022. "Do property rights matter for bank loans? Evidence from China," Finance Research Letters, Elsevier, vol. 48(C).
    40. Montes, Gabriel Caldas & Bastos, Júlio Cesar Albuquerque & de Oliveira, Ana Jordânia, 2019. "Fiscal transparency, government effectiveness and government spending efficiency: Some international evidence based on panel data approach," Economic Modelling, Elsevier, vol. 79(C), pages 211-225.
    41. Senlin Miao & Gary Gang Tian & Fenghua Wen & Jinli Xiao, 2024. "The Independence of Judges and Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 193(3), pages 633-653, September.
    42. Sattar A. Mansi & William F. Maxwell & John K. Wald, 2009. "Creditor Protection Laws and the Cost of Debt," Journal of Law and Economics, University of Chicago Press, vol. 52(4), pages 701-717, November.
    43. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    44. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
    45. Boubakri, Narjess & Guedhami, Omrane & Mishra, Dev & Saffar, Walid, 2012. "Political connections and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 541-559.
    46. A. P. Lerner, 1934. "The Concept of Monopoly and the Measurement of Monopoly Power," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 1(3), pages 157-175.
    47. Yaxuan Qi & Lukas Roth & John Wald, 2017. "Creditor protection laws, debt financing, and corporate investment over the business cycle," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(4), pages 477-497, May.
    48. Gao, Huasheng & Li, Kai & Ma, Yujing, 2021. "Stakeholder Orientation and the Cost of Debt: Evidence from State-Level Adoption of Constituency Statutes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(6), pages 1908-1944, September.
    49. Joel F. Houston & Liangliang Jiang & Chen Lin & Yue Ma, 2014. "Political Connections and the Cost of Bank Loans," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 52(1), pages 193-243, March.
    50. Sreedhar T. Bharath & Tyler Shumway, 2008. "Forecasting Default with the Merton Distance to Default Model," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1339-1369, May.
    51. Meng, Qingbin & Li, Xinyu & Chan, Kam C. & Gao, Shenghao, 2020. "Does short selling affect a firm's financial constraints?," Journal of Corporate Finance, Elsevier, vol. 60(C).
    52. Huiying Luo & Xiaohui Liu & Aiqi Wu & Xiaotong Zhong, 2021. "Is it possible to escape? Local protectionism and outward foreign direct investment by Chinese privately-owned enterprises," Asia Pacific Journal of Management, Springer, vol. 38(4), pages 1499-1524, December.
    53. F. Andrew Hanssen, 2004. "Is There a Politically Optimal Level of Judicial Independence?," American Economic Review, American Economic Association, vol. 94(3), pages 712-729, June.
    54. Jun Qian & Philip E. Strahan, 2007. "How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans," Journal of Finance, American Finance Association, vol. 62(6), pages 2803-2834, December.
    55. Bai, Chong-En & Du, Yingjuan & Tao, Zhigang & Tong, Sarah Y., 2004. "Local protectionism and regional specialization: evidence from China's industries," Journal of International Economics, Elsevier, vol. 63(2), pages 397-417, July.
    56. Laeven, Luc & Majnoni, Giovanni, 2005. "Does judicial efficiency lower the cost of credit?," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1791-1812, July.
    57. Arena, Matteo P., 2018. "Corporate litigation and debt," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 202-215.
    58. Callaway, Brantly & Sant’Anna, Pedro H.C., 2021. "Difference-in-Differences with multiple time periods," Journal of Econometrics, Elsevier, vol. 225(2), pages 200-230.
    59. Ghouma, Hatem & Ben-Nasr, Hamdi & Yan, Ruiqian, 2018. "Corporate governance and cost of debt financing: Empirical evidence from Canada," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 138-148.
    60. Boubaker, Sabri & Cellier, Alexis & Manita, Riadh & Saeed, Asif, 2020. "Does corporate social responsibility reduce financial distress risk?," Economic Modelling, Elsevier, vol. 91(C), pages 835-851.
    61. Hong Zhou & Chang Zhou & Wanfa Lin & Guoping Li, 2017. "Corporate governance and credit spreads on corporate bonds: an empirical study in the context of China," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 5(1), pages 50-72, January.
    62. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lv, Dayong & Ye, Qi & Jiang, Yan & Wei, Xiaokun, 2025. "Enhanced judicial independence and bond credit spreads: Evidence from the establishment of circuit courts," Research in International Business and Finance, Elsevier, vol. 79(C).
    2. Zhang, Yufei & Ye, Guanhong, 2025. "Judicial independence and corporate ESG performance," Economic Analysis and Policy, Elsevier, vol. 88(C), pages 1789-1818.
    3. Chai, Weidi & Zhang, Chunyu & Cui, Yongmei & Ma, Xiaohong, 2026. "The dark side of capital flexibility: Subscribed capital system reform and creditor interests in China," China Economic Review, Elsevier, vol. 95(C).
    4. Fang, Xubing & Liu, Maotao, 2024. "Regional judicial capacity and corporate total factor productivity: Evidence from the establishment of circuit courts," Structural Change and Economic Dynamics, Elsevier, vol. 71(C), pages 465-489.
    5. Inmaculada Aguiar‐Díaz & Ewelina Monica Mruk & María Victoria Ruiz‐Mallorquí, 2024. "Judicial efficiency, debt structure, and cost of debt," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(6), pages 3541-3563, September.
    6. Dai, Xiang & Lv, Jin Roc & Yang, Chen, 2026. "Bankruptcy courts and capital structures," Economic Analysis and Policy, Elsevier, vol. 89(C), pages 57-72.
    7. Li, Pei & Liu, Kaihao & Lu, Yi & Peng, Lu, 2025. "Organizing regulatory structure and local air quality: Evidence from the environmental vertical management reform in China," Journal of Comparative Economics, Elsevier, vol. 53(1), pages 139-164.
    8. Cui, Huan-yu & Cao, Yue-qun, 2025. "Environmental justice, ethical transformation: Environmental courts and corporate ESG performance," Journal of Asian Economics, Elsevier, vol. 100(C).
    9. Xing, Qiuhang & Xu, Gaoshuang & Wang, Yanping, 2024. "Open government data and the cost of debt," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    10. Li, Tongxia & Lu, Chun & Xu, Lei, 2025. "Access to finance and cost stickiness: Evidence from anti-recharacterization laws," Advances in accounting, Elsevier, vol. 68(C).
    11. Tu, Hao & Yang, Shenggang & Dong, Minyi & Dai, Pengyi, 2025. "Judicial Independence and Corporate Total Factor Productivity: Evidence from provincial court centralization," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 1946-1961.
    12. Zhou, Kuo & Qu, Zhi & Guo, Yiman & Hu, Runnian, 2025. "Does a firm's intelligent technological transformation matter for its access to financial resources?," Economic Modelling, Elsevier, vol. 149(C).
    13. Schweizer, Denis & Walker, Thomas & Zhang, Aoran, 2023. "False hopes and blind beliefs: How political connections affect China's corporate bond market," Journal of Banking & Finance, Elsevier, vol. 151(C).
    14. Li, Tongxia & Ang, Tze Chuan ‘Chewie’ & Lu, Chun, 2023. "Employment protection and the provision of trade credit," Journal of Banking & Finance, Elsevier, vol. 155(C).
    15. Ater, Brandon & Hansen, Bowe, 2021. "Do the specific countries in which a multinational corporation operates affect its private loan contracts?," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    16. Dong, Nanyan & Zhang, Jiang & Xu, Xiangbing & Ou, Peiyu, 2026. "Judicial Independence and corporate labor investment: Evidence from China," Emerging Markets Review, Elsevier, vol. 70(C).
    17. Hu, Xun & Xue, Cheng & Zhao, Xiangfang, 2025. "Corporate bond defaults and cross-regional investment: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 1514-1533.
    18. Chasiotis, Ioannis & Loukopoulos, Georgios & Toudas, Kanellos, 2024. "Organization capital, dividends and firm value: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 97(C).
    19. Nguyen, Harvey & Pham, Mia Hang & Vu, Van Hoang, 2025. "Executives’ early-life experience and corporate debt contracting: Evidence from CEO military experience," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 103(C).
    20. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:ausman:v:51:y:2026:i:1:p:174-210. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.agsm.edu.au .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.