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

Abstract

AbstractThis 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.