Product market effects of expropriation risk: Evidence from a quasi-natural experiment in China

Abstract

Expropriation risk is detrimental to firm development and economic growth. Using the enactment of the 2007 Property Law in China as an exogenous shock that reduces the expropriation risk of private firms, we study the effect of property protection on private firms’ product market performance. We find that property protection increases product market performance, as evidenced by private firms facing greater expropriation risk before the Law exhibit better product market performance after the Law. We further find that this effect is stronger for firms that face greater expropriation risk before the Law, such as firms without political relation, firms in cities with higher fiscal pressure, and firms with higher geographic concentration. Channel analyses show that such effect may be a result of an increase in investment and a decrease in rent-extracting coercive spending. Additional analyses indicate such effect is restricted to firms in regions with higher enforcement efficiency and in more competitive industries.