Environmental judicial independence and corporate investment efficiency: Evidence from a quasi-natural experiment in China

Abstract

This study investigates the influence of environmental judicial independence on corporate investment efficiency, utilizing the staggered establishment of environmental courts in China as a natural experiment. Our findings indicate that the establishment of environmental courts improves corporate investment efficiency mainly by reducing overinvestment, rather than addressing underinvestment. Channel analysis demonstrates that the establishment of environmental courts raises the risk of environmental litigation, subsequently lowering agency costs through enhanced management oversight, and intensifying financing constraints imposed by financial institutions, thereby enhancing corporate investment efficiency. Cross-sectional analyses indicate that this effect is more pronounced in regions with inadequate legal environment, weak environmental regulation, and among firms with poor environmental management and performance. Collectively, this study highlights the importance of environmental judicial independence and underscores the vital role of the environmental judicial system in improving the efficiency of capital allocation among firms.