HONG KONG, CHINA - Media OutReach - 25July 2019 - Researchers say the Chinesegovernment has suppressed more than 60 percent of the judicial disclosures inlitigation cases involving public limit companies -- even though suchdisclosures have been required by law since 2014.

The study "Transparencyin an Autocracy: China's 'Missing Cases' in Judicial Opinion Disclosure"reveals evidence that the Chinese courts' disclosure decisions are subject topolitical influence from the executive branch of the government, with thesuppression of judicial disclosures stronger among state-owned enterprises(SOEs) and businesses located in the same province as the courts.

"This isconsistent with the notion that courts are more likely to protect SOEs andfirms that are located within their own provinces," says Prof.Tianyu Zhang, Professor of School of Accounting at The ChineseUniversity of Hong Kong (CUHK) Business School. "Public disclosure of thejudicial opinions may raise people's attention about the firms and preventgovernment leaders from showing favoritism to them."

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

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

The teamcollected a sample of companies' mandated disclosures, involving 5,370 litigationcases between 2008 and 2016. They then tracked down the judicial disclosures ofthese cases on the courts' online platform, either through the case serialnumbers or the names of the parties involved. And they found that only 37 percentof the cases were disclosed by the courts.

"This showsthat the Chinese government is suppressing most of the judicial disclosures,even though they are required by the SupremePeople's Court (SPC) of China," says Prof. Zhang.

PoliticalIncentives Behind Transparency

To discover whether their resultswere driven by local leaders' political incentives, the team examined whetherthe court decisions were determined by the political and economic status of thefirms.

"We believe local governmentsshow greater favoritism to those firms that contribute large tax revenues tothe province, or are large in size, and so therefore provide the province withsignificant employment," says Prof. Zhang.

Consistent with their politicaltheory, they found that the SOE disclosure bias is stronger for firms that areranked among the top 10 percent of listed firms -- either in terms of theirtotal tax contributions or size in the province.

"Our results also showprovincial governments are more likely to suppress court disclosures involvingSOEs located in their provinces in the year before the promotion of their partysecretaries than during other years.

"This is because they want toavoid 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 allfirms featured in judicial disclosures, including an "abnormal" dropin their share prices, and also difficulty in obtaining equity and debtfinancing -- both heavily regulated by the government -- when compared with firmswhose litigation cases were not disclosed.

Transparencyis a Double-Edge Sword

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

"The results show how governmenttransparency is biased by politics in an authoritarian regime, and how thisbias has economic consequences to the market," Prof. Zhang says.

Transparency is usually associatedwith democracies; few authoritarian states show much interest in governmenttransparency. So why would China's judicial leadership even bother to embracethe practice of making court judgments public?

The primary motivation appears to bea desire to curb wrongdoing in local courts through the lens of publicoversight.

"Transparency in autocracies isa double-edged sword," Prof. Zhang says. "While transparency canraise a regime's legitimacy by building trust and enhancing economic growth, itcan also increase public scrutiny and destabilise the autocratic government'spower."

Studying how autocratic regimes makedisclosure decisions to maintain the balance in transparency has significantpolitical, social and economic implications.

"The setting is particularlyimportant because of the increasingly prominent role China plays in the globalarena, and because of concerns over the sustainability of Chinese economicgrowth with underdeveloped formal institutions," he says.

Lackof Data on Transparency in China

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

"It is difficult to gathergovernment disclosure information to conduct large sample studies sinceautocrats fear that publicly sharing sensitive information will destabilisetheir power.

"Even if officials are willingto order the release of information, finding a suitable benchmark for measuringthe quality of its disclosure is a challenge; normally the public does not findout if the information supposed to be revealed has been suppressed.

"In an autocratic regime, thepublic do sometimes get to know about the government suppressing or delaying areport on sensitive information -- for example, the milk powder scandal in Chinaduring the 2008 Beijing Olympics [when melamine was added to infant milkpowder] -- but that is more of an exception," he says.

Yet since 1 January 2014, the SPC hasmade it mandatory for Chinese courts to disclose judicial opinions online. Theexemptions are cases involving state secrets and personal privacy, juvenilecrime, cases concluded by court administered mediation and other judgmentsdeemed inappropriate for disclosure on the internet.

In a 2015 white paper, the SPCadmitted that the purpose of improving transparency was to "facilitatejudicial fairness, prevent corruption in the judicial system and improve judicialcredibility".

This move meant the researchers hadaccess to a dedicated centralised disclosure website, "China CourtJudgments", where all courts must upload their judicial opinions forpublic consultation.

They were also able to use a comprehensivesample of the listed companies' litigation cases through the firms' owndisclosures -- mandated by the China Securities Law -- as a sample of benchmarkcases to make a direct comparison with the courts' judicial disclosures.

"This meant we could identifythose corporate litigation cases the courts had suppressed -- and why they hadmade such decisions," Prof. Zhang says.

JudicialFavouritism in Disclosure

China is a highly centralised countrywith a strong bureaucratic government: there is no real separation of thejudicial, executive, and legislative branches of government.

With the exception of the selectionof the head of each provincial court, the appointment of all other provincialjudges must be approved -- directly or indirectly -- by its party secretary.

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

Yet rules stipulated by thecentralised government can be in conflict with local interests. Often localgovernments have strong incentives to interfere with the application of thecentral law.

"The SPC's initiative toincrease transparency in judicial disclosure is particularly challenging forlocal courts -- of provincial level or below," Prof. Zhang says.

"These courts receive dualleadership and supervision from higher levels of the judiciary, and from theparty committee at the local levels. So, the goals of the SPC, as a part of thecentral government, and the local governments are not always aligned.

"Chinese courts also lack theauthority to compel compliance with the law by institutions of similar orhigher rank than them. This leads to frequent intervention into court decisionsby other government institutions."

NegativePolitical Implications for Greater Openness

The central government is likely tosupport litigation disclosures where some legal details will have been madepublic already -- according to law -- by the firms themselves. While moredetailed accounts of the judicial opinions will be provided by the courtsthemselves, these opinions about litigation involving businesses will notusually involve politically sensitive information that threatens the government'spower.

However, the judiciary's greateropenness can have very negative political implications for the executive branchof the government.

"This conflict between the twobranches of government is particularly acute when economic performance is animportant factor in deciding promotion of local-level politicians, includingthose from the provinces," he says.

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

"If these are businesses thelocal governments favour, disclosure of the judgment will prevent thegovernment from pressuring the courts to lighten the penalty, or limit itsability to grant more favours to the companies," he adds.

Since the provincial government canalso pressure local judges not to disclose judicial opinions about the firms itfavours, it remains unclear whether the Chinese government will disclose orsuppress listed firms' litigation cases.

"If the political reasons fordisclosure outweigh those to suppress information, there remains the empiricalquestion: which of these political considerations will greatly influence thegovernment's disclosure decisions?

Prof. Zhang says the study's resultscan be explained as "a special type of judicial favouritism.

About CUHK Business School

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

In the Financial Times GlobalMBA Ranking 2019, CUHK MBAis ranked 57^th. In FT's2018 EMBA ranking, CUHK EMBA isranked 29^th in the world. CUHK Business School has the largestnumber of business alumni (36,000+) amonguniversities/business schools in Hong Kong -- many ofwhom are key business leaders. The School currently has about4,400 undergraduate and postgraduate students andProfessor Kalok Chan is the Dean of CUHK Business School.

More information is available atwww.bschool.cuhk.edu.hkor by connecting with CUHK Business Schoolon Facebook: www.facebook.com/cuhkbschooland LinkedIn: www.linkedin.com/school/3923680/.