Financial order matters: The real effect of financial-judicial trials on stock price informativeness

Abstract

Financial-judicial trials play a critical role in maintaining a sound financial order that is essential for the informativeness of stock prices. By utilizing panel data from judgment documents on crimes of undermining order of financial management in prefecture-level cities from China Judgments Online between 2014 and 2021, we find that firms in cities with high intensity and efficiency of financial-judicial trials exhibit greater stock price informativeness. This result is robust across several checks, and we address potential endogeneity issues by leveraging the establishment of China's first financial court, the Shanghai Financial Court, as a quasi-natural experiment and including a Bartik instrumental variable. The mechanism analyses indicate that financial-judicial trials enhance stock price informativeness by promoting corporate governance and information disclosure quality. Heterogeneous analyses reveal that this relationship is particularly evident for nonpolitically connected firms, firms with general managers who do not have a legal background, highly competitive industries, and firms in areas with lower marketization. In addition, our results also show that the positive impact of financial-judicial trials on stock price informativeness contributes to enhanced investment efficiency, and that enhanced financial-judicial trials reduce stock price delays. Our study deepens the understanding of the positive role of financial-judicial trials in enhancing stock price informativeness from the financial order maintenance perspective.