The Establishment of Circuit Courts and Corporate Fraud

Abstract

ABSTRACT This paper examines the impact of the establishment of circuit courts on corporate fraud. Using a quasi-natural experiment in China and the difference-in-differences approach, we find that corporate fraud is significantly lower following the establishment of circuit courts. The reduction in fraud is more pronounced for companies with poor internal and external governance and weak information disclosures. The mechanism analysis shows that circuit courts increase litigation risks faced by companies and deter corporate fraud. Overall, the findings suggest that circuit courts are an effective legal institution to constrain corporate fraud.