Enhanced judicial independence and bond credit spreads: Evidence from the establishment of circuit courts

Dayong Lv, Qi Ye, Yan Jiang and Xiaokun Wei

Research in International Business and Finance, 2025, vol. 79, issue C

Abstract: Using a large sample of bonds issued by Chinese listed firms from 2010 to 2021, we explore the relationship between judicial independence as improved by Circuit Courts (CCs) and bond credit spreads (BCS). We find that bond issuers covered by CCs experience a decrease in BCS compared to those uncovered. This result remains unchanged under various checks, including a propensity score matching method, entropy balance method, difference-in-differences framework, alternative sample, and other robust tests. In addition, this favorable effect of improved judicial independence is greater for issuers with greater default risks or liquidity risks, consistent with the “perceived lower recovery risk story” and “perceived lower liquidity risk story.” Finally, this effect is stronger for bond issuers operating in regions with poor legal environments, higher levels of local protectionism, or stronger government interventions. Our paper stresses the important role of the judiciary in decreasing debt financing costs.

Keywords: Judicial independence; Bond credit spread; Bond liquidity; Law and finance (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:79:y:2025:i:c:s0275531925003204

DOI: 10.1016/j.ribaf.2025.103064

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