Expropriation Risk and Investment: A Natural Experiment

HKUST IEMS Working Papers No. 83

Siddharth M. Bhambhwani, Hui Dong & Allen Huang

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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