Judicial institutional design and corporate litigation: Evidence from a natural experiment in China

Abstract The judicial institutions of a country impact corporate litigation. From 2003 to 2010, China allowed the appointed secretaries of the Committee of Political and Legislative Affairs to hold concurrent administrative roles (CAR) as directors of the Police Departments in their respective provinces. Such a policy provides a natural experiment on the change of the judicial environment. In this paper, we employ a Staggered Difference‐in‐Differences method to study the effect of changes in judicial institution on corporate litigation using data on publicly traded corporations from 1998 to 2010. We find corporations engage in fewer corporate litigations during the time period of China's CAR policy (i.e., when judicial justice was likely weaker). Further analysis shows that the probability of winning lawsuits increases for non‐state‐owned enterprises. Mechanism analysis shows that the CAR policy heightens the uncertainty of economic policies by changing companies' perceptions of the status of political and legal institutions in the judicial system, thereby reducing corporate judicial participation.