The Real and Financial Effects of Property Rights : Evidence from a Natural Experiment

The 2007 Property Law in China checked the power of local governments to expropriate the assets of private firms and it gave creditors (primarily banks) more rights over the assets underlying their secured loans to private firms. We use the property law as a natural experiment for understanding the real and financial effects of property rights on firms. Using a panel of over seven hundred listed private firms, we show that after the enactment firms increased the quantity and efficiency of their investments. We also document using several measures that firms had more access to external finance: firms became less dependent on their internal cash flows for financing their investments, firms issued more debt, firms held less cash, the marginal value of their cash fell and the cash flow sensitivity of their cash dropped. We argue that the beneficial impacts of this law should have been more profound for firms that had a large stock of tangible assets and more growth opportunities and less profound for politically connected firms. Our comprehensive set of estimates confirms these predictions. Consistent with the above findings, we find that the property law had a strong announcement effect. Specifically, firms with better opportunities for growth, lower cash flows, higher tangibility and that did not have political connections had higher cumulative abnormal returns around the time when the law was announced