Digital Justice and Corporate Borrowing: Evidence From a Quasi‐Natural Experiment

ABSTRACT Previous research documents conflicting views on the impact of strengthening creditor rights on corporate borrowing. Using the establishment of an Internet‐integrated judicial enforcement system (i.e., smart courts) in China as a quasi‐natural experiment, this study examines the impact of digital justice on creditors' lending decisions. We posit that smart courts improve the judicial system's efficiency, quality, and fairness, thereby reducing creditors' costs and risks and facilitating corporate borrowing. We find that firms in cities with established smart courts obtain relatively larger loans at lower costs. The effects of smart courts are more pronounced for firms with weak political connections and elevated information asymmetry and are particularly stronger in regions characterised by weaker legal protection. Overall, our findings highlight the positive impact of digital justice on the efficiency and quality of the legal system and its externalities extending beyond the legal sphere to corporate financing activities.