Circuit Courts, Local Protectionism, and Upward Real Earnings Management: The Role of Judicial Reform

Using China’s establishment of circuit courts as a quasi-natural experiment, this study examines how judicial reform affects corporate behavior. Based on city-level and listed-firm data from 2012 to 2016, we find that circuit courts significantly suppress upward real earnings management in highly protectionist regions and mitigate protectionism-induced increases in firms’ relational expenditures and tax refunds. The effect is stronger where market competition is intense, legal institutions are weak, and internal governance is poor, revealing a substitution effect between judicial enforcement and market or governance mechanisms. These findings highlight circuit courts’ dual role in dismantling local protectionism and curbing corporate misconduct, underscoring the importance of rule-of-law institutions for market integration in emerging economies.