Judicial Independence and Cash Flow: Evidence from a Natural Experiment in China

Date01 December 2019
Published date01 December 2019
AuthorXianhang Qian
Judicial Independence and Cash
Flow: Evidence from a Natural
Experiment in China*
School of Economics, Shandong University, Jinan, China
This paper supplements studies on the economic consequences of judicial
independence from the perspective of cash ow. It explores the rotation of
local judges as an exogenous shock that increases local judicial independence
in China and analyses the impact of rotation on provincial cash inow using
data from Chinas high-value payment system. The difference-in-difference
estimates indicate that the rotation of the judges can attract more outside
cash inow, including amount and average size. This effect persists even after
controlling for the endogeneity concern and the effect of disaster. The results
of the dynamic effects show that the impact of the rotation of the judges on
cash inow mostly originates in the second and third years after the rotation.
We further nd that judicial independence can promote more foreign direct
investment, venture capitals investment, and bank loans and clarify the
impacting mechanisms of judicial independence on cash inow.
JEL Codes: E22; K40; P14
Accepted: 22 March 2018
The important role of investor protection in economic behavior has been
widely recognized, and judicial independence is viewed as critical to the promo-
tion of investor protection (North and Weingast 1989). Current studies have
demonstrated that judicial independence not only promotes macro-level eco-
nomic and political freedom (La Porta et al. 2004) and economic growth (Feld
and Voigt 2003; Voigt et al. 2015), but also heightens micro-level factors such
as rmsstock returns (Klerman and Mahoney 2005) and entrepreneurship
activity (Dove 2015). However, there is a lack of studies regarding judicial inde-
pendence and cash ow, although cash ow plays a crucial role in promoting
economic growth (Barro and Sala-i-Martin 2004). Therefore, this paper attempts
* I would like to thank Professor Ramazan Gencay (Editor) and an anonymous reviewer for their
valuable and insightful comments. The author acknowledges nancial support from the Natural Sci-
ence Foundation of Shandong Province (ZR2018QG006), the Program of Qilu Young Scholars of
Shandong University, and the Taishan Scholar Program of Shandong Province.
© 2018 International Review of Finance Ltd. 2018
International Review of Finance, 19:4, 2019: pp. 863875
DOI: 10.1111/ir.12192

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