Property rights, political connections, and corporate investment
Meng Miao, Dragon Yongjun Tang, Lixin Colin Xu, Xiao Yan
Review of Finance, Volume 28, Issue 2, March 2024, Pages 593–619, https://doi.org/10.1093/rof/rfad029
Strengthening property rights, the critical goal of modern economic systems, is expected to facilitate investment and development. We investigate a unique property rights reform in Shenzhen, the most dynamic Chinese city adjacent to Hong Kong, in an attempt to answer this question about the close relationship between property rights enforcement and political influence in developing countries. Under the property rights reform implemented in Shenzhen in 2012, allocated landholders may “buy” land titles from the local government, i.e., pay the government for land titling, with government approval. We treat this property rights reform as an exogenous shock to allocated land users in Shenzhen.
We find that, relative to otherwise comparable firms, titling firms on average have higher investment rates by 16.3 percentage points after the titling program. Thus, enhancing property rights encourages investment, and the result remains robust in a series of robustness checks. Adopting plausible assumptions, our back-of-the-envelope welfare analysis suggests that a nationwide implementation of the reform could increase investment in China by 8.9%.
Our analysis indicates that connected firms were favored in the process of titling because they were less likely to face obstacles from the government and challenges from other claimholders and were therefore more likely to increase their investment. We cast light on the channels at work through a unique program that requires the titling firms to “buy” the title by handing over the proceeds equal to the land’s market value. This institutional setting helps us exclude the collateral channel, as bank loans from collateralizing the titled land or the proceeds from selling the land can hardly compensate for the payment made to purchase the title. Consequently, any additional investments from titling must be caused by better protection against expropriation. In support of this view, we find positive titling effects when the firm was more susceptible to expropriation, either when its original tenure of allocated land expired or when the underlying land rights were contested.
Our paper speaks to the discussions on the conditions and factors that facilitate the success of institution reforms, which have been widely agreed to be important but little understood (Rodrik, 2006). Our findings here suggest that many standard reforms (such as establishing formal property rights) could unlevel the playing field: those with political connections are more likely to benefit from the reforms due to their access to the government apparatus and thus the fewer obstacles they face during the reform process. Even though our findings are from China, they are likely applicable to other developing countries where access to power remains utterly important for all walks of life and throughout the world (Acemoglu and Robinson, 2008). In the absence of formal institutions that protect property rights in the majority of developing nations, informal institutions, such as political ties, serve as a crucial substitute. Goldstein and Udry (2008), for instance, found that chiefs’ land is less likely to be expropriated and more likely to lie fallow.
