The Effect of Property Rights Protection on Capital Structure: Evidence from a Chinese Natural Experiment

49 Pages Posted: 18 Dec 2018 Last revised: 29 Jul 2019

See all articles by Yixin Liu

Yixin Liu

University of New Hampshire

Yu Liu

University of Texas Rio Grande Valley

William L. Megginson

University of Oklahoma

Zuobao Wei

University of Texas at El Paso

Date Written: July 28, 2019

Abstract


We examine how changes in property rights security impact firm capital structure decisions by exploiting a natural experiment, the enactment of China’s Property Rights Law in 2007 (the Law). Using a large dataset of China’s non-listed firms, we document an overall decrease in leverage after the Law’s passage. This finding is consistent with the reinvestment hypothesis which stipulates that as property rights protection strengthens, firms are willing to reinvest more of their profits, thus leading to less use of external debts (Johnson, et al., American Economic Review, 2002). We then examine how the Law affects firms of various degrees of financial constraint and document that relatively more constrained firms experience an increase in leverage following the Law’s enactment. This finding is consistent with the financial constraint hypothesis which argues that as creditor rights are strengthened, lenders are more willing to extend credits to financially constrained firms (Djankov, et al., Journal of Political Economics, 2008). In comparison analyses, we verify that leverage also declines for listed companies after the Law’s passage, but financial constraints do not significantly impact the magnitude of this decline.

Keywords: China, Property rights protection, Capital structure, Leverage

JEL Classification: K11, G32, G38

Suggested Citation

Liu, Yixin and Liu, Yu and Megginson, William L. and Wei, Zuobao, The Effect of Property Rights Protection on Capital Structure: Evidence from a Chinese Natural Experiment (July 28, 2019). Available at SSRN: https://ssrn.com/abstract=3293435 or http://dx.doi.org/10.2139/ssrn.3293435

Yixin Liu

University of New Hampshire ( email )

Durham, NH 03824
United States
603-862-3357 (Phone)

Yu Liu

University of Texas Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX
United States

William L. Megginson

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

Zuobao Wei (Contact Author)

University of Texas at El Paso ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915-747-5381 (Phone)
915-747-6282 (Fax)

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