Does legal justice promote stakeholder justice? Evidence from a judicial reform in China

Abstract

This paper investigates how judicial quality affects corporate social responsibility (CSR) performance. Employing a difference-in-differences model based on the establishment of circuit courts in China and a sample of Chinese A-share listed firms from 2010 to 2020, we find that enhanced judicial quality improves firms' CSR performance. Further analysis shows that CSR helps reduce the incidence and expense of lawsuits and financial constraints arising after the circuit court establishment and mitigates negative market responses toward lawsuit announcements. This suggests that CSR has strategic value against lawsuits and firms' incentives to reduce litigation costs, financial constraints, and adverse market reactions are the potential mechanisms. The effect of judicial quality on CSR performance is more pronounced for firms with greater ex-ante litigation risk, lower ex-ante CSR awareness, and close to circuit courts. Overall, this study highlights a novel externality of the judiciary and suggests that legal justice can promote stakeholder justice.