Anti-corruption campaign, political connections, and court bias: Evidence from Chinese corporate lawsuits

Abstract

This paper establishes the presence of political corruption in court and identifies a novel channel—interfering with court decisions—through which local corrupt politicians provide political favors for politically connected firms. Using a unique data set of 11,238 commercial lawsuits involving Chinese listed firms, we examine how China's recent anti-corruption campaign, one of whose goals is to combat political interference in the courts, affects court advantages of politically connected firms. We find that connected firms' win rates dropped by 6.3% after the anti-corruption, suggesting that the campaign stopped corrupt politicians transferring 1.8% of total monetary amounts of commercial disputes from unconnected to politically connected parties by influencing trials. The effect is more salient for firms connected to more powerful officials, noncontract-based cases, lower-level courts, regions with weak legal environments, and courts that depend more on local government. Moreover, anti-corruption promotes a better judicial environment, not only improves the quality of judicial decisions, but also boosts public confidence in the judicial system, and encourages firms to settle conflicts through court. Finally, we explore the campaign's broader economic influences and find that after the campaign, cities with initially poorly functioning judiciaries gained more investment, employed more labor, produced more output, and attracted more new firms, particularly in those industries with high contract intensity. Overall, the anti-corruption campaign significantly improved the judicial and economic environment in China.