The Real and Financial Effects of Property Rights: Evidence from a Natural Experiment

52 Pages Posted: 27 Mar 2013

See all articles by Daniel Berkowitz

Daniel Berkowitz

University of Pittsburgh - Department of Economics

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Date Written: March 25, 2013

Abstract

The 2007 Property Law in China checked the power of local governments to expropriate the assets of private firms and it gave creditors (primarily banks) more rights over the assets underlying their secured loans to private firms. We use the property law as a natural experiment for understanding the real and financial effects of property rights on firms. Using a panel of over seven hundred listed private firms, we show that after the enactment firms increased the quantity and efficiency of their investments. We also document using several measures that firms had more access to external finance: firms became less dependent on their internal cash flows for financing their investments, firms issued more debt, firms held less cash, the marginal value of their cash fell and the cash flow sensitivity of their cash dropped. We argue that the beneficial impacts of this law should have been more profound for firms that had a large stock of tangible assets and more growth opportunities and less profound for politically connected firms. Our comprehensive set of estimates confirms these predictions. Consistent with the above findings, we find that the property law had a strong announcement effect. Specifically, firms with better opportunities for growth, lower cash flows, higher tangibility and that did not have political connections had higher cumulative abnormal returns around the time when the law was announced.

Keywords: property law, corporate investments, corporate cash holdings

JEL Classification: K11, G31, G38

Suggested Citation

Berkowitz, Daniel and Lin, Chen and Ma, Yue, The Real and Financial Effects of Property Rights: Evidence from a Natural Experiment (March 25, 2013). Available at SSRN: https://ssrn.com/abstract=2239490 or http://dx.doi.org/10.2139/ssrn.2239490

Daniel Berkowitz

University of Pittsburgh - Department of Economics ( email )

4711 WWPH
Pittsburgh, PA 15260
United States
412-648-7072 (Phone)
412-648-3011 (Fax)

HOME PAGE: http://www.pitt.edu/~dmberk

Chen Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

Register to save articles to
your library

Register

Paper statistics

Downloads
176
Abstract Views
1,000
rank
173,553
PlumX Metrics