How Property Rights Affect Firm’s Labor Investment Efficiency? Evidence from a Property Law Enactment in China

ABSTRACT

The previous studies mainly focus on how property rights affect firm’s physical investment. Although the scale of labor investment is larger than physical investment, little is known about how property rights affect firm’s labor investment decision. In this paper, we exploit a property law enactment as an exogenous shock and use a difference-in-differences methodology with all the Chinese A-share firms from 2004 to 2010. We find that strong property rights enhance firm’s labor investment efficiency and the efficiency improvement derives from less underinvestment in labor. The effect of property rights on labor investment efficiency is more pronounced when firms face more government intervention and firms rely more on external finance before the enactment of property law. The results suggest that legal rights protection channel and financing convenience channel are potential mechanisms through which property rights influence labor investment efficiency. Overall, our results indicate that property rights play an important role in encouraging firms to invest in intangible assets and reshaping firm’s investment patterns.

KEYWORDS:

• Property rights
• labor investment efficiency
• expropriation risk
• external financing

JEL:

• J24
• K11
• O16

Acknowledgments

We are grateful for constructive comments from an anonymous reviewer and the editors (James Saunoris and Paresh Kumar Narayan). All errors are our responsibility. All errors are our responsibility.

Disclosure Statement

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work presented in this paper.

Notes

1. The data are collected from following website: https://www.census.gov/data/tables/2016/econ/asm/2016-asm.html

2. We will elaborate this point in Section 2.1.

3. Berkowitz, Lin, and Ma (2015) argue that standing committees make a nearly final decision on whether the draft is passed or not and the passage of full session of NPC tends to be a formality.

4. As Berkowitz, Lin, and Ma (2015) has already illustrated this point carefully in their paper, we refer to their conclusions directly instead of enumerating the specific Article.

5. Find more details at https://www.scmp.com/article/585997/number-illegal-land-grabs-soars

6. Find more details at https://www.scmp.com/article/427342/zhuhai-government-tries-grab-big-slice-zhu-kuan

7. In order to obtain a matched sample, we first regress Group on a series of control variables used above in a Logit model. Then, we estimate the propensity score for every observation. Finally, for each treatment firm, we choose a similar control firm who has the closest propensity score with the treatment firm.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71902024,71902025, 72102203]; Social Sciences Foundation of the Ministry of Education in China [19YJC630126, 19YJC630033]; Social Science Planning Project of Fujian Province [FJ2020C034]; Major Project of Philosophy and Social Science Research in Jiangsu Province [2020SJZDA059].