Judicial independence and corporate fraud: evidence from the unified management of local courts below the provincial level

Judicial independence is important for listed-firm quality and investor protection. Using the staggered rollout of the unified management of personnel, funding and assets in local courts below the provincial level as a quasi-natural experiment, we examine whether judicial independence constrains corporate fraud. The reform significantly reduces both the incidence and frequency of corporate fraud among Chinese listed firms. The effect is more pronounced in regions with fewer listed firms, in areas with stronger government intervention, and among politically connected firms. Mechanism tests suggest that greater judicial independence reduces local judicial protectionism, encourages investors to seek judicial remedies and limits local-government interference with media coverage and regulatory investigations. The evidence clarifies how judicial independence affects capital-market outcomes and offers policy implications for strengthening corporate governance, deterring corporate fraud and improving listed-firm quality.