How does regional judicial quality improvement enhance enterprises' capital allocation efficiency: Evidence from the establishment of circuit court

This paper makes a valuable contribution to the existing research framework on finance and law. The subject of this investigation is the efficacy of capital resource allocation in enterprises in response to regional judicial quality enhancements. This study explicitly employs the establishment of circuit courts as a natural experiment to investigate the causal relationship between the efficacy of capital allocation and judicial enhancement in enterprises that operated from 2012 to 2022. The findings suggest that the effective implementation of circuit courts can enhance the efficiency of capital allocation for firms by reducing finance costs and increasing the productivity of all factors. Nevertheless, the findings do not apply to all enterprises. Heterogeneous analysis suggests that enterprises subject to more severe financial constraints are more susceptible to changes in the legal environment. Furthermore, the heterogeneous effects of a variety of legal environments suggest that the inherent legal environment has a substantial impact on the improvement of regional judicial quality. This paper provides a unique viewpoint on the inefficiency of enterprises' allocation of capital resources. • Introducing circuit courts can enhance the efficiency of capital allocation. • The governance effects are achieved by reducing finance costs and increasing the productivity. • Financial constraints and legal environments induce heterogeneous policy effects.