Does judicial improvement promote corporate trade credit financing? Evidence from the establishment of circuit courts in China

The establishment of circuit courts is an important measure to enhance judicial impartiality and independence, and thus improve the local judicial environment. This paper takes the establishment of circuit court as a quasi-natural experiment of judicial improvement, and empirically examines the impact of judicial improvement on trade credit financing by using a staggered difference-in-differences (DID) model with Chinese firms from 2009 to 2023 as the research sample. It is found that the trade credit financing of enterprises after the establishment of the circuit court increases significantly. The mechanism test indicates that improving local judicial efficiency, alleviating local protectionism and reducing corporate defaults are important channels through which the establishment of circuit courts promotes corporate trade credit financing. Heterogeneity tests indicate that the positive effect of circuit court establishment on trade credit financing is systematically stronger for a state-owned enterprises, firms without political connections, and those exhibiting higher gross profit margins, smaller size, or weaker pre-existing financing capacity. This paper provides empirical evidence that the legal environment improvement is conductive to the financial market development.