Download This PaperExpropriation Risk and Investment: A Natural Experiment
Journal of Financial and Quantitative Analysis, Forthcoming
50 Pages Posted: 25 Apr 2023 Last revised: 20 Jun 2023
Date Written: March 10, 2023
Abstract
This paper uses the enactment of China’s 2007 Property Law (the Law), which reduces the risk of expropriation by local governments, as the setting to investigate the importance of property rights protection for private firm investment. Using propensity score matching and a difference-in-differences design, we find that firms facing weaker property rights protection prior to the Law significantly increase their investment and investment efficiency after the Law. Cross-sectional analyses document evidence consistent with a decrease in firms’ perceived expropriation risk as the main mechanism underlying the Law’s effect. Finally, we show that the Law improves local economic outcomes and employment.
Keywords: Property Rights, Expropriation Risk, Investment, Investment Efficiency, Employment, Legal Institutions, China
JEL Classification: K11, L38, O43, P14
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