Judicial independence and earnings management

Abstract We investigate the crucial relationship between judicial independence and corporate earnings management, utilising China's staggered judicial delocalisation reform. We establish a causal and negative relationship between the judicial independence of local courts and corporate earnings management. Channel analyses demonstrate that judicial independence limits local government officials' capacity to interfere in corporate decisions and increases the ex post legal risks for information distortion. This effect is particularly pronounced among non‐state‐owned enterprises and in regions with stronger institutional frameworks. These findings highlight the indispensable role of judicial independence in fortifying the rule of law and reducing corporate information distortion.