Judicial Reform and Privatization of State-owned Enterprises: Empirical Evidence from China’s Public-Private Partnership Market

Abstract Given the widely held belief that state-owned enterprises (SOEs) are inefficient, scholars have long been interested in the determinants of privatization. However, current studies have largely focused on political, political economy, or economic determinants of privatization. This article examines whether judicial independence affects the extent of privatization by focusing on a reform that has been gradually implemented in China since 2014, which removes local governments’ authority over the financial and personnel decisions of local courts, resulting in a significant enhancement of the independence of these courts. It finds empirical evidence showing that a more independent judicial system promotes the degree of privatization in China’s public-private partnership (PPP) market. These findings suggest that SOEs are prevalent in China at least partly because of the lack of an independent judicial system that can protect the property interests of private investors against government expropriation. Enhancing judicial independence promotes investors’ confidence in making investments, which contributes to a higher degree of privatization through a market-driven mechanism.