The Value of Judicial Independence: Evidence from 18th Century England

Abstract

This paper assesses the impact of judicial independence on equity markets. North and Weingast (1989) argue that judicial independence and other institutional changes inaugurated by the Glorious Revolution of 1688-89 allowed the English government credibly to commit to repay sovereign debt and more generally to protect contractual and property rights. Although they provide some supporting empirical evidence, they do not investigate the effect of judicial independence separately from that of other institutional innovations. This paper is the first to attempt to do so. We look at share price movements at critical points in the passage of the 1701 Act of Settlement and other events which gave judges greater security of tenure and higher salaries. Our results suggest that giving judges tenure during good behavior had a large and statistically significant positive impact on share prices, while salary increases and other improvements to judicial independence had impacts which were consistently positive, but not individually statistically significant.

Keywords: Judicial independence, Glorious Revolution, law and finance

JEL Classification: H11, K40, N43