This study investigates how China's judicial independence reform curbs local protectionism, thereby enhancing the efficiency and rational allocation of governmental resources, particularly among state-owned enterprises (SOEs) and local SOEs.
Based on the quasi-natural experiment of China's 2014–2019 judicial management reform, this study employs a difference-in-differences (DID) model to empirically examine the impact of judicial independence on the efficiency of government subsidies. To ensure robustness, a series of validation methods are applied, including alternative sample tests, cross–fixed effects estimation, controlling for confounding events (circuit courts), placebo tests and parallel trend tests.
The reform curbs local protectionism and significantly reduces government subsidies to SOEs, especially local SOEs. Three mechanisms explain this outcome: (1) eliminating resource allocation barriers, (2) enhancing resource allocation efficiency and (3) intensifying regulatory scrutiny towards resource allocation. Although R&D subsidies and expenditures declined, innovation outputs increased, indicating improved efficiency of innovation resource allocation. Furthermore, the reform generates positive abnormal stock returns around subsidy announcements, reflecting enhanced investor confidence in judicial impartiality and improved fiscal transparency.
This study makes three main contributions. First, it integrates judicial independence into the analytical framework of government subsidy allocation, emphasizing institutional quality as a determinant of fiscal efficiency. Second, it reveals a novel mechanism linking judicial reform to corporate innovation through subsidy restructuring, offering new insights into law–finance–innovation interactions. Third, it identifies the market announcement effect of judicial reforms, demonstrating how enhanced judicial impartiality fosters investor confidence and enterprise value.
