Turning the Wheels of Justice: How Judicial Reforms Deter Corporate Misconduct in China

Ziqiao Wang, Wei Zhang, Feng He, Xin Huang

Journal of Business Ethics · 2026 · Volume 204 · Issue 2

Abstract

This paper investigates the impact of changes in formal institutional infrastructure on corporate unethical decision-making. Using the establishment of circuit courts as a quasi-exogenous shock to China’s local judiciary, we find that improved judicial independence and impartiality significantly reduce corporate misconduct. This reduction is primarily observed in misconduct cases related to information disclosure and operational practices. Further analysis reveals that the establishment of circuit courts enhances external disciplinary pressure and fosters corporate ethical self-discipline. Cross-sectional heterogeneity tests show that this impact is more pronounced among firms with stronger political ties, higher information asymmetry, greater operational uncertainty, and weaker local ethical constraints. This study highlights that strengthening formal institutional infrastructure can deter unethical corporate behavior by restoring the flows of regulation and ideology from the external parties to firms, thereby realigning them with societal value.

Keywords

Formal institutions, Judicial quality, Corporate misconduct, Litigation pressure

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