Exploiting the quasi-natural experiment of establishing district courts in China, we find that the enhanced judicial independence that has followed the circuit court reform significantly reduces the cost of debt financing. The reduction is driven by the alleviation of local protectionism and enhanced judicial efficiency, both of which strengthen the credibility and enforceability of contracts. The impact is more pronounced for firms that have non-political executives, high default and litigation risks, and weak market power. Further analyses reveal increased loan supply and improved credit quality for financially constrained firms post-reform, contributing to regional economic growth. This research enriches the discourse on judicial independence and financial development by demonstrating the pathways through which legal reforms enhance the accessibility and cost-effectiveness of external finance in emerging markets.
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