Judicial Independence and Political Connection: Evidence From China

Abstract

Research Question/Issue Ample evidence highlights the importance of accumulating political assets to mitigate external uncertainty. However, relatively little is known about when firms decide to reduce their political connections. This study examines how firms adjust their politician appointments in response to the improvements in institutional quality. Research Findings/Insights This study utilizes a unique research setting involving the establishment of circuit courts in China. As a part of judicial reform, the establishment of circuit courts substantially enhances local judicial independence. The results reveal that as judicial independence strengthens, firms tend to reduce their reliance on political connections and consequently appoint fewer politicians to their boards and/or top management teams. The negative relationship between judicial independence and politician appointments is more pronounced when firms are engaged in interfirm R&D collaboration and less pronounced when economic policy uncertainty is high. Theoretical/Academic Implications Building on resource dependence theory, this study explores firms' nonmarket strategies by examining how they reduce engagement with local political connections as legal institutions improve. In addition, this study adds to the antecedents of political connections from an institutional perspective. Practitioner/Policy Implications The findings highlight the value of legal reforms that promote judicial impartiality and independence. Moreover, practitioners can benefit from institutional improvements by balancing market and nonmarket strategies.