Expropriation Risk and Investment: A Natural Experiment
HKUST IEMS Working Papers No. 83
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Siddharth M. Bhambhwani, Hui Dong & Allen Huang
Update
The working paper first published on this webpage has since been updated. To obtain the most updated version of the paper, please refer to
Bhambhwani, Siddharth M. and Dong, Hui and Huang, Allen, 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
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 after the Law. Cross-sectional analyses document further evidence indicating that a decrease in firms’ perceived expropriation risk is the mechanism underlying the Law’s effect. Overall, our results suggest that stronger property rights induce greater investment in private firms.
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