Pricing legal risk: independent directors and China's circuit court establishment

Speaker: YU Bangxing

Chair: QIU Yang

Venue: Room A215, School of Management, Zijingang campus

Abstract: This study examines how improved judicial independence affects corporate governance using the staggered establishment of circuit courts in China. By reducing local protectionism, these courts increase firms’ exposure to litigation risk. We find that independent director compensation rises following the reform. The evidence supports an efficient contracting explanation rather than rent extraction. The increase is stronger in regions with greater prior protectionism and for directors located farther from the firm. The effect persists in firms with strong external monitoring and high product market competition, where agency concerns are less pronounced. Additional analyses show that the reform leads to more active board oversight, reflected in more dissenting votes and greater director expertise. Overall, our study suggests that improvements in judicial independence reshape corporate contracting by increasing the value of effective board monitoring in response to higher legal risk