The Impact Of Judicial Improvement On The Value Of Corporate Guanxi Capital And Further Efficiency Consequences

Contemporary China is in a critical period of economic transformation.Cultivating and improving the institutional basis suitable for the socio-economic characteristics of each stage of transformation is very important for the smooth and efficient completion of the transformation,so as to promote the rapid development of the economy.For a long time,the formal system represented by law and the informal system represented by Guanxi have jointly promoted the evolution of social economy.At the same time,the relative status and role of the two types of systems are also changing in stages with the development of social economy.A good legal government can increase the fairness and predictability of market transactions,improve the contract environment,reduce transaction costs,and ensure the vitality of the market economy.After decades of legal construction,China’s underlying written legal system has been relatively complete,but there have been many problems in the judicial field,such as the localization of justice and the low trial and adjudication ability of local judicial departments.In the context of the lack of perfect judicial quality,Guanxi can replace the law to play the role of transaction governance and property rights protection.Specifically,at the micro enterprise level,Guanxi capital has a non-negligible impact on corporate resource acquisition and transaction organization.However,with the improvement of judicial quality,the importance of Guanxi in guiding resource allocation,factor flow and ensuring market operation will gradually decline,and the value of Guanxi capital will gradually weaken.Under the institutional background of China’s transitional economy and human society,understanding the interaction between legal environment and Guanxi capital is conductive to effectively guarantee and reasonably guide economic transformation,which is of great significance for promoting economic transformation smoothly and efficiently.However,there are few studies on this issue.Since the 18^th CPC National Congress,the government has attached great importance to the construction of the legal system and have made important plans for comprehensively deepening the reform of judicial system.The establishment of Circuit Court is proposed as a major judicial system reform measure.Using the establishment of Circuit Court ad an exogenous shock on the regional judicial quality,this paper examines the impact of judicial improvement on the value of Guanxi capital,and further examines the efficiency consequences of the above interaction between judicial improvement and Guanxi capital.From the perspective of cost-benefit trade-off of companies,this paper investigates the changes of corporate Guanxi capital investment and corporate Guanxi capital benefit after judicial improvement,so as to jointly prove the impact of judicial improvement on the corporate Guanxi capital.Firstly,using the setting up of the Circuit Court as an exogenous impact on the regional judicial quality and using the business entertainment fee as the measure of the investment made by companies to obtain Guanxi capital,this paper finds that after the establishment of the Circuit Court,the Guanxi capital investment of companies decreases significantly,and this result is more pronounced when the initial legal environment of the region is poor,which reflects the remarkable effect of the Circuit Court in unifying the application of law and improving judicial quality.This paper further examines the changes of other forms of Guanxi capital investment,and finds that corporate social donation and the appoint of independent directors with personal Guanxi capital both show obvious downward trend after the establishment of the Circuit Court.The above results show that with the improvement of judicial quality,the investment made by companies to obtain Guanxi capital decreases significantly,which confirms the impact of judicial improvement on the value of Guanxi capital from the cost side.Secondly,corresponding to the investigation of corporate Guanxi capital investment,this paper investigates the impact of judicial improvement on the benefit obtained by companies from Guanxi capital.We find that after the establishment of the Circuit Court,the government subsidies received by high Guanxi capital companies decreased significantly,and the government subsidies received by low Guanxi capital companies increased significantly.When the initial legal environment of the region where the corporate is located is poor,the above results are more pronounced.In addition,we examine the change of another important kind of Guanxi capital benefit,i.e.,the credit resources,and obtain the result consistent with the government subsidies,that is,after the establishment of the credit resources obtained by high Guanxi capital companies significantly decrease,and the credit resources obtained by low Guanxi capital companies increase significantly.The above results suggest that with the improvement of judicial quality,the benefit obtained by companies from Guanxi capital decreases,and the unbalanced allocation of resources in companies with different levels of Guanxi capital under the Guanxi framework is alleviated.The results confirm the impact of judicial improvement on the value of Guanxi capital from the benefit side.Collectively,after the establishment of the Circuit Court,the changes of Guanxi capital investment and Guanxi capital benefit jointly support the interactive characteristics of law and Guanxi:the judicial improvement leads to the decline of the value of corporate Guanxi capital.Finally,this paper examines the further efficiency consequences of the interaction between judicial improvement and corporate Guanxi capital.We find that after the establishment of the Circuit Court,the investment efficiency of low Guanxi capital company significantly improves,which is mainly reflected in the significant alleviation of insufficient investment and this result is more pronounced when the initial legal environment in the region where the company is located is poor.The results suggest that under the incomplete legal environment,companies with low level of Guanxi capital are not only difficult to obtain resources under the legal framework,but also at a disadvantage in resource competition under the Guanxi framework.Therefore,such companies face the problem of insufficient investment caused by resource constraints.With the improvement of judicial quality,the acquisition of resources by such companies increases,and the problem of insufficient investment is mitigated.We don’t find that the judicial improvement has a significant impact on the investment efficiency of high Guanxi capital companies.The reasons may be that high Guanxi capital companies under the Guanxi framework do not generally have inefficient investment.The impact of the interaction between law and Guanxi on the economic efficiency of companies with high Guanxi capital is worthy of further discussion from other perspectives in the future.This paper further investigates the efficiency consequences of the impact of judicial improvement on the value of Guanxi capital from the industrial level and the market level.At the industrial level,this paper finds that the establishment of the Circuit Court promotes the industrial division of labor,which indicates that the impact of judicial improvement on the value of Guanxi capital is a good interaction process of improving the contract environment and reducing transaction costs.At the market level,this paper finds that after the establishment of the Circuit Court,the efficiency of resource allocation among companies improves significantly,which indicates that with the improvement of judicial quality,more resources flow from low productivity companies to high productivity companies,and the market resource allocation has been optimized.Overall,the above results show that the impact of judicial improvement on the value of corporate Guanxi capital is conductive to the improvement of economic efficiency.By investigating the impact of judicial improvement on the value of corporate Guanxi capital and the further efficiency consequences at the enterprise,industry and market levels,this paper depicts the logical chain from the improvement of legal system to the adjustment of micro enterprise behavior and finally the optimization of the efficiency of resource allocation of the whole society,which is conductive to revealing the micro process and mechanism of the transformation and development of emerging economies.The main contributions of this paper are as follows:（1）this paper makes a systematic analysis and large sample empirical test on the interactive characteristics and efficiency consequences of law and Guanxi.Law and Guanxi are two typical systems that have a far-reaching impact on China’s social economy,however,most of the studies on law and Guanxi in the Chinese market focus on their respective unilateral economic consequences.Scholars pay less attention to the interactive characteristics of the two systems.This paper fills the research gap in this filed.（2）This paper expands the research on the microeconomic consequences of the legal environment.Most of these studies focus on the direct effect of the legal environment on corporate behavior or corporate governance.Based on the social background of“Guanxi standard”and“different order pattern”in China,this paper focuses on the reflection of the impact of judicial improvement on the value of Guanxi capital on corporate finance and governance behavior,so as to expand the research perspective of the microeconomic consequences of the legal environment.（3）This paper supplements the few studies that evaluate the consequences of the establishment of the Circuit Court from the perspective of corporate finance.Since the Circuit Court system was proposed and implemented,the research on the consequences of its establishment has mainly focused on the theoretical discussion in the legal field.The empirical research on this issue from the perspective of corporate finance is still very scarce.Based on micro enterprise data,this paper examines the value impact of the establishment of the Circuit Court on Guanxi capital through the changes of corporate finance and governance behavior,which enriches the researches on evaluating the effect of the establishment of the Circuit Court from the perspective of corporate finance.（4）This paper deepens the understanding of the efficiency consequences of Guanxi capital.The exiting research has not reached a consensus conclusion on whether the Guanxi capital has a positive or negative impact on the efficiency of enterprises and markets.This paper systematically analyzes the governance role and changes on market transactions of Guanxi and its corresponding Guanxi contract in the process of economic transformation,dynamically investigates the impact of the improvement of judicial quality on the value of Guanxi capital and further on the efficiency of micro enterprises,meso industries and macro markets,thus analyzing the efficiency consequences of Guanxi capital from a dialectical perspective and deepening the understanding of this issue.Finally,this paper has certain practical implication:（1）this paper finds that the improvement of judicial quality can improve the investment efficiency of companies,deepen the level of industrial division labor,and improve the allocation of market resources,which fully reflects the significant positive impact of judicial quality on the development of market economy.Therefore,the government should unswervingly promote the reform of judicial system,constantly improve the Circuit Court system,thus creating a fair and stable market environment.（2）On the one hand,market subjects should enhance legal awareness,strictly abide by law and regulations,carry out transactions,perform contracts and obtain resources within the scope permitted by law.On the other hand,although this paper finds that the value of Guanxi capital is gradually declining with the improvement of judicial quality,it does not mean that Guanxi capital will be worthless.As a deep-rooted cultural tradition in China,Guanxi will exist for a long time and continue to play a role in the future.Market players should treat Guanxi capital reasonably,make effective use of the resources obtained from Guanxi capital,and coordinate the balance between the construction of Guanxi capital and the cultivation of enterprise core competitiveness.