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

48 Pages Posted: 18 Dec 2018 Last revised: 4 Feb 2020

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: December 18, 2018

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 non-listed firms, we document a significant overall decrease in leverage after the Law’s passage, consistent with the reinvestment hypothesis’ prediction that business owners are willing to reinvest more of their profits as property rights protection strengthens, substituting for external debt. Financially constrained firms experience a relative increase in leverage following the Law’s enactment, consistent with the financial constraint hypothesis’ prediction that lenders are willing to extend more credits to financially constrained firms as creditor rights are strengthened. We also document a leverage decline in China’s listed firms after the Law’s enactment.

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 (December 18, 2018). 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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