Property Rights Protection Through Litigations: Ownership Bias and the Role of Political Connections

Abstract

We use adversarial corporate litigations between state owned and private owned firms in China to examine the strength of state provided formal institutions in protecting private property rights. Based on a unique hand collected data from 3,323 court rulings and 272 settlements on Chinese listed firms during 1998 to 2010, we show state owned firms have a win rate that is 8.6% higher than the private owned ones. Their advantages are most significant on cases with straight forward merits, in provinces where the local legal institutions are weak, and when cases are tried in their home provinces. Nevertheless, private owned firms can, through establishing political ties, increase their win rate in court and partially correct the ownership disadvantages when faced with state owned enterprises. The empirical result is robust to our test of the selection of disputes for litigation, plaintiff effect, lenders effect, and an array of party and case idiosyncrasies.

Keywords: property rights, politically connected firms, corporate litigation, judicial bias, China

JEL Classification: P14, K41