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

Yurou Liu

Journal of Corporate Finance, 2023, vol. 83, issue C

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.

Keywords: Judicial independence; Circuit court; Crash risk; Legal environment (search for similar items in EconPapers)
JEL-codes: G12 G14 K4 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:83:y:2023:i:c:s0929119923001396

DOI: 10.1016/j.jcorpfin.2023.102490

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