CUHK Business School Reveals How Court Transparency in China is Biased by Politics and How the Bias Has Economic Consequences

HONG KONG, CHINA – Media OutReach�- 25
July 2019 – Researchers say the Chinese
government has suppressed more than 60 percent of the judicial disclosures in
litigation cases involving public limit companies — even though such
disclosures have been required by law since 2014.

 

The study “Transparency
in an Autocracy: China’s ‘Missing Cases’ in Judicial Opinion Disclosure”
reveals evidence that the Chinese courts’ disclosure decisions are subject to
political influence from the executive branch of the government, with the
suppression of judicial disclosures stronger among state-owned enterprises
(SOEs) and businesses located in the same province as the courts.

 

“This is
consistent with the notion that courts are more likely to protect SOEs and
firms that are located within their own provinces,” says Prof.
Tianyu Zhang, Professor of School of Accounting at The Chinese
University of Hong Kong (CUHK) Business School. “Public disclosure of the
judicial opinions may raise people’s attention about the firms and prevent
government leaders from showing favoritism to them.”

 

Prof. Zhang who
has recently been named the second most prolific author by Abacus,
with six papers on the Chinese capital market published in Tier 1 journals and
a total of 2,493 citations during the 1999-2018 period.

 

In collaboration
with Prof. Zhang, the research team features Prof. Zhuang Liu, Assistant
Professor of Law and Economics at CUHK-Shenzhen; Prof. T.J. Wong, Joseph A.
DeBell Professor of Business Administration and Professor of Accounting at
University of Southern California Marshall School of Business; and Prof. Yi Yang,
Assistant Professor of Accounting at the Southwestern University of Finance and
Economics, Chengdu.

 

The team
collected a sample of companies’ mandated disclosures, involving 5,370 litigation
cases between 2008 and 2016. They then tracked down the judicial disclosures of
these cases on the courts’ online platform, either through the case serial
numbers or the names of the parties involved. And they found that only 37 percent
of the cases were disclosed by the courts.

 

“This shows
that the Chinese government is suppressing most of the judicial disclosures,
even though they are required by the Supreme
People’s Court (SPC) of China,” says Prof. Zhang.

 

Political
Incentives Behind Transparency

To discover whether their results
were driven by local leaders’ political incentives, the team examined whether
the court decisions were determined by the political and economic status of the
firms.

“We believe local governments
show greater favoritism to those firms that contribute large tax revenues to
the province, or are large in size, and so therefore provide the province with
significant employment,” says Prof. Zhang.

 

Consistent with their political
theory, they found that the SOE disclosure bias is stronger for firms that are
ranked among the top 10 percent of listed firms — either in terms of their
total tax contributions or size in the province.

 

“Our results also show
provincial governments are more likely to suppress court disclosures involving
SOEs located in their provinces in the year before the promotion of their party
secretaries than during other years.

 

“This is because they want to
avoid any negative information that might pose a risk to their politicians’
chances of career advancement in the government,” he explains.

 

There are financial costs for all
firms featured in judicial disclosures, including an “abnormal” drop
in their share prices, and also difficulty in obtaining equity and debt
financing — both heavily regulated by the government — when compared with firms
whose litigation cases were not disclosed.

 

Transparency
is a Double-Edge Sword

Their findings support the view that
the government does not favour companies featured in judicial disclosures and
the market therefore perceives them negatively.

 

“The results show how government
transparency is biased by politics in an authoritarian regime, and how this
bias has economic consequences to the market,” Prof. Zhang says.

 

Transparency is usually associated
with democracies; few authoritarian states show much interest in government
transparency. So why would China’s judicial leadership even bother to embrace
the practice of making court judgments public?

 

The primary motivation appears to be
a desire to curb wrongdoing in local courts through the lens of public
oversight.

 

“Transparency in autocracies is
a double-edged sword,” Prof. Zhang says. “While transparency can
raise a regime’s legitimacy by building trust and enhancing economic growth, it
can also increase public scrutiny and destabilise the autocratic government’s
power.”

 

Studying how autocratic regimes make
disclosure decisions to maintain the balance in transparency has significant
political, social and economic implications.

 

“The setting is particularly
important because of the increasingly prominent role China plays in the global
arena, and because of concerns over the sustainability of Chinese economic
growth with underdeveloped formal institutions,” he says.

 

Lack
of Data on Transparency in China

Transparency in China has not been
widely studied before because of the lack of suitable data.

“It is difficult to gather
government disclosure information to conduct large sample studies since
autocrats fear that publicly sharing sensitive information will destabilise
their power.

 

“Even if officials are willing
to order the release of information, finding a suitable benchmark for measuring
the quality of its disclosure is a challenge; normally the public does not find
out if the information supposed to be revealed has been suppressed.

 

“In an autocratic regime, the
public do sometimes get to know about the government suppressing or delaying a
report on sensitive information — for example, the milk powder scandal in China
during the 2008 Beijing Olympics [when melamine was added to infant milk
powder] — but that is more of an exception,” he says.

 

Yet since 1 January 2014, the SPC has
made it mandatory for Chinese courts to disclose judicial opinions online. The
exemptions are cases involving state secrets and personal privacy, juvenile
crime, cases concluded by court administered mediation and other judgments
deemed inappropriate for disclosure on the internet.

 

In a 2015 white paper, the SPC
admitted that the purpose of improving transparency was to “facilitate
judicial fairness, prevent corruption in the judicial system and improve judicial
credibility”.

 

This move meant the researchers had
access to a dedicated centralised disclosure website, “China Court
Judgments”, where all courts must upload their judicial opinions for
public consultation.

 

They were also able to use a comprehensive
sample of the listed companies’ litigation cases through the firms’ own
disclosures — mandated by the China Securities Law — as a sample of benchmark
cases to make a direct comparison with the courts’ judicial disclosures.

 

“This meant we could identify
those corporate litigation cases the courts had suppressed — and why they had
made such decisions,” Prof. Zhang says.

 

Judicial
Favouritism in Disclosure

China is a highly centralised country
with a strong bureaucratic government: there is no real separation of the
judicial, executive, and legislative branches of government.

 

With the exception of the selection
of the head of each provincial court, the appointment of all other provincial
judges must be approved — directly or indirectly — by its party secretary.

 

The primary goal of the SPC, as a
part of the central government, is to apply the law made by the central
government in a unified way all around the country.

 

Yet rules stipulated by the
centralised government can be in conflict with local interests. Often local
governments have strong incentives to interfere with the application of the
central law.

 

“The SPC’s initiative to
increase transparency in judicial disclosure is particularly challenging for
local courts — of provincial level or below,” Prof. Zhang says.

 

“These courts receive dual
leadership and supervision from higher levels of the judiciary, and from the
party committee at the local levels. So, the goals of the SPC, as a part of the
central government, and the local governments are not always aligned.

 

“Chinese courts also lack the
authority to compel compliance with the law by institutions of similar or
higher rank than them. This leads to frequent intervention into court decisions
by other government institutions.”

 

Negative
Political Implications for Greater Openness

The central government is likely to
support litigation disclosures where some legal details will have been made
public already — according to law — by the firms themselves. While more
detailed accounts of the judicial opinions will be provided by the courts
themselves, these opinions about litigation involving businesses will not
usually involve politically sensitive information that threatens the government’s
power.

 

However, the judiciary’s greater
openness can have very negative political implications for the executive branch
of the government.

 

“This conflict between the two
branches of government is particularly acute when economic performance is an
important factor in deciding promotion of local-level politicians, including
those from the provinces,” he says.

 

Disclosing these judicial opinions
will heighten public attention or scrutiny of companies in the cases.

 

“If these are businesses the
local governments favour, disclosure of the judgment will prevent the
government from pressuring the courts to lighten the penalty, or limit its
ability to grant more favours to the companies,” he adds.

 

Since the provincial government can
also pressure local judges not to disclose judicial opinions about the firms it
favours, it remains unclear whether the Chinese government will disclose or
suppress listed firms’ litigation cases.

 

“If the political reasons for
disclosure outweigh those to suppress information, there remains the empirical
question: which of these political considerations will greatly influence the
government’s disclosure decisions?

 

Prof. Zhang says the study’s results
can be explained as “a special type of judicial favouritism.

 

“China
is often perceived as having a highly capricious judiciary. Firms in cases
where the courts choose not to reveal the judicial disclosure have certain
advantages over their counterparts — although these advantages are hard to
detect under an opaque government,” he says.

About CUHK Business School

CUHK Business School comprises two schools — Accountancy
and Hotel and Tourism Management — and four departments —
Decision Sciences and Managerial Economics,
Finance, Management and Marketing. Established in Hong
Kong in 1963, it is the first business school to offer BBA, MBA and Executive
MBA programmes in the region. Today, the School
offers 8 undergraduate programmes and 20
graduate programmes including MBA, EMBA,
Master, MSc, MPhil and Ph.D.

 

In the Financial Times Global
MBA Ranking 2019, CUHK MBA
is ranked 57^th. In FT‘s
2018 EMBA ranking, CUHK EMBA is
ranked 29^th in the world. CUHK Business School has the largest
number of business alumni (36,000+) among
universities/business schools in Hong Kong — many of
whom are key business leaders. The School currently has about
4,400 undergraduate and postgraduate students and
Professor Kalok Chan is the Dean of CUHK Business School.

 

More information is available at
www.bschool.cuhk.edu.hk
or by connecting with CUHK Business School
on Facebook: www.facebook.com/cuhkbschool
and LinkedIn: www.linkedin.com/school/3923680/.