Expropriation Risk and Investment: A Natural Experiment

Journal of Financial and Quantitative Analysis, Forthcoming

HKUST Business School Research Paper No. 2023-108

50 Pages Posted: 25 Apr 2023 Last revised: 20 Jun 2023

See all articles by Siddharth Bhambhwani

Siddharth Bhambhwani

Arkansas Tech University

Hui Dong

Shanghai University of Finance and Economics - School of Accountancy

Allen H. Huang

Hong Kong University of Science and Technology - Department of Accounting

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

Suggested Citation

Bhambhwani, Siddharth and Dong, Hui and Huang, Allen H., Expropriation Risk and Investment: A Natural Experiment (March 10, 2023). Journal of Financial and Quantitative Analysis, Forthcoming, HKUST Business School Research Paper No. 2023-108, Available at SSRN: https://ssrn.com/abstract=4419751 or http://dx.doi.org/10.2139/ssrn.4419751

Siddharth Bhambhwani

Arkansas Tech University ( email )

AR
United States

Hui Dong

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Allen H. Huang (Contact Author)

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
HKUST
Clear Water Bay, Kowloon
Hong Kong

HOME PAGE: http://www.AllenHuang.org

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