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Expropriation Risk and Investment: A Natural Experiment

Published online by Cambridge University Press:  30 August 2023

Siddharth M. Bhambhwani ,
Hui Dong  and
Allen H. Huang Open the ORCID record for Allen H. Huang [Opens in a new window]
Siddharth M. Bhambhwani
Affiliation:
Arkansas Tech University College of Business and Economic Development [email protected]
Hui Dong
Affiliation:
Shanghai University of Finance and Economics School of Accountancy [email protected]
Allen H. Huang*
Affiliation:
Hong Kong University of Science and Technology School of Business and Management
*
[email protected] (corresponding author)
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Abstract

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This article 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 7 , November 2024 , pp. 3448 - 3478
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Daniel Berkowitz (the referee), Md Nazmul Hasan Bhuyan, Ran Duchin (the editor), Veljko Fotak, Jia He, Daniel te Kaat, Miguel Minutti-Meza, Matthew Phillips, David Reeb, Chao Tang, and workshop participants at Tongji University, the 2020 China Finance Annual Meeting, the 2023 China Financial Research Conference, the 2021 Hawaii Accounting Research Conference, the 2020 Japanese Accounting Review Conference, the 2021 Southwest Finance Association, the 2021 Eastern Finance Association, the 2021 European Accounting Association, and the 2021 Financial Management Association meetings for helpful comments and valuable suggestions. Ting Dai, Hui Wang, Juanting Wang, and Irene Xiao provided excellent research assistance. Dong acknowledges financial support from the National Natural Science Foundation of China (72172079); the MOE Project of Key Research Institute of Humanities and Social Science in University (22JJD790094); and the 111 Project (B18033). Huang and Bhambhwani acknowledge financial support from HKUST Business School and the HKUST Institute for Emerging Markets (IEMS19BM02). Bhambhwani also acknowledges financial support from Washington College. All errors are our own.

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