Judicial Independence and Corporate Innovation : Evidence From the Establishment of Circuit Courts

This paper explores the effect of judicial quality on corporate innovation by taking advantage of the staggered establishment of Circuit Courts in China. We find that the introduction of Circuit Courts increases corporate innovation, particularly for central SOEs and private firms. Channel analysis show that the Circuit Courts significantly reduce local judicial protectionism, ease financial constraints and improve corporate governance, which in turn stimulates innovation. The positive effects of the Circuit Courts are more pronounced in cities facing severe political intervention by city leaders, regions with weak legal environment, and for firms without political and banking connections. Our results are robust to endogeneity concerns, alternative measures and specification models. Overall, this paper supports the theoretical arguments that institutions matter and the improvement in judicial quality boosts firms’ incentives to innovate