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

• Date: 01 December 2019
• Published date: 01 December 2019
• Author: Xianhang Qian
• DOI: http://doi.org/10.1111/irfi.12192

Judicial Independence and Cash

Flow: Evidence from a Natural

Experiment in China*

XIANHANG QIAN

School of Economics, Shandong University, Jinan, China

ABSTRACT

This paper supplements studies on the economic consequences of judicial

independence from the perspective of cash flow. 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 inflow using

data from China’s high-value payment system. The difference-in-difference

estimates indicate that the rotation of the judges can attract more outside

cash inflow, 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 inflow mostly originates in the second and third years after the rotation.

We further find that judicial independence can promote more foreign direct

investment, venture capital’s investment, and bank loans and clarify the

impacting mechanisms of judicial independence on cash inflow.

JEL Codes: E22; K40; P14

Accepted: 22 March 2018

I. INTRODUCTION

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 firms’stock returns (Klerman and Mahoney 2005) and entrepreneurship

activity (Dove 2015). However, there is a lack of studies regarding judicial inde-

pendence and cash flow, although cash flow 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 financial 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. 863–875

DOI: 10.1111/irfi.12192