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

Rui Fan, Ruoyu Weng and Jianping Pan

Emerging Markets Finance and Trade, 2022, vol. 58, issue 2, 381-397

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.

Date: 2022
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DOI: 10.1080/1540496X.2021.1987215

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