Judicial independence and corporate employment: Evidence from China

Abstract

We investigate how firms respond to strengthening of judicial independence by examining employment decisions following staggered judicial independence reform in China. We provide robust evidence that the reform leads to salient promotion in employee numbers. Alleviated financing frictions, increased labor demand and improved information quality are three plausible channels that allow independent judicial system to promote corporate employment. Further, we find the reform improves firms’ labor investment efficiency. We estimate that employment effect translates into economically important outcomes in innovation outputs and firm performance. Our paper provides new insights into the real effects of judicial independence on labor allocation and the economy.