Creditor Protection and Corporate Risk-Taking: A Quasi-Natural Experiment Based on the Implementation of Bankruptcy Law and Real Rights Law
WANG Hongjian, WU Jinghua, CAO Yuqiang
School of Finance, Jiangxi University of Finance and Economics; School of Accounting, Hunan University of Technology and Business; School of Accounting, Guangdong University of Foreign Studies
Summary:
Modern economics research demonstrates that protecting real rights is an important cornerstone for promoting economic growth and financial market development. The promulgation and implementation ofReal Rights Law of the People's Republic of China(hereinafter referred to as the“Real Rights Law”)marks an increase in real rights protection in China. However, the literature mainly studies the economic effects of the Real Rights Law from the perspective of the expanded list of potential collateral and constraints on corporate finance, ignoring how it strengthens creditor protections. Meanwhile, the implementation of Enterprise Bankruptcy Law of the People's Republic of China (hereinafter referred to as the “Bankruptcy Law”) on June 1, 2007, established and improved legal protections for creditors. Against this background, understanding how changes in the creditor protection regime affect the credit market and stable development of the real economy is extremely important. Creditor protection has long been an important issue in corporate finance. The literature about the effects of creditor protection on corporate economic behavior comprises two main categories: The first studies how enhancing creditor protection affects borrowing behavior from creditors' perspective and finds that an increase in the level of creditor protection eliminates credit market frictions and enhances creditors' willingness to take risks, thus increasing the availability of corporate finance. The other category examines the effects of creditor protection enhancements from the debtors' perspective. The main findings are that creditor protection enhancements increase the risk of transferring control to creditors, which reduces debtors' willingness to take risks and ultimately has a negative effect on a firm's product market performance. The essence of risk-taking is that managers are good at grasping investment opportunities and bearing investment risks to obtain excess profits. This is the driving force behind the sustainable development of enterprises and an important factor in improving enterprise value. Companies that are willing to take risks and pursue good investment opportunities ultimately promote long-term economic growth. The implementation of China's 2007 Bankruptcy and Real Rights Laws provide a research opportunity to identify the relationship between creditor protection and corporate risk-taking. Using the 2007 Bankruptcy and Real Rights Laws as a quasi-natural experiment, we construct a sample of firms with high bankruptcy risk and study the effects of creditor protection on corporate risk-taking using the difference-in-differences method. After excluding alternative explanations, this study finds that strong creditor protections significantly inhibit corporate risk-taking. Further tests show that this effect is more pronounced for those in regions with more efficient law enforcement. The economic consequences test shows that the reduction in a firm's willingness to take risks as creditor protections become more stringent significantly weakens its product market performance. The academic contributions of this study are summarized as follows. First, from the risk-taking perspective, this paper extends the research on the economic consequences of creditor protection by verifying the impact of strengthened creditor protections on corporate risk-taking and identifying its mechanism. Second, using a difference-in-differences model and taking the 2007 implementation of China's Bankruptcy and Real Rights Laws as a quasi-natural experiment, this paper identifies the causal relationship between creditor protections and corporate risk-taking.
王红建, 吴静桦, 曹瑜强. 债权人保护与公司风险承担——基于《破产法》和《物权法》实施的准自然实验[J]. 金融研究, 2023, 512(2): 189-206.
WANG Hongjian, WU Jinghua, CAO Yuqiang. Creditor Protection and Corporate Risk-Taking: A Quasi-Natural Experiment Based on the Implementation of Bankruptcy Law and Real Rights Law. Journal of Financial Research, 2023, 512(2): 189-206.
Acemoglu, D. and S. Johnson. 2005. “Unbundling Institutions”, Journal of Political Economy, 113(51): 949～995.
[13]
Acharya, V.V., Y. Almeida, and L. Litov. 2011. “Creditor Rights and Corporate Risk-Taking”, Journal of Financial Economics, 102(1):150～166.
[14]
Altman, E. I., and R. Haldeman. 1995. “Corporate Credit-Scoring Models: Approaches and Tests for Successful Implementation”, Journal of Commercial Lending,77(9):10～22.
[15]
Altman, E. I. 2000. “Predicting Financial Distress of Companies: Revisiting the Z-Score and ZETA Models”,Stern School of Business, New York University.
[16]
Atanasov, V., Black, B., Ciccotello, C. and S. Gyoshev. 2010. “How does Law Affect Finance？ An Examination of Equity Tunneling in Bulgaria”, Journal of Financial Economics, 96(1):155～173.
[17]
Bae, K. H., and V. K. Goyal. 2009. “Creditor Rights, Enforcement, and Bank Loans”, The Journal of Finance, 64(2):823～860.
[18]
Baumol, W. J., Litan, R. E. and C. J. Schramm. 2007. “Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity”, Yale University Press.
[19]
Berkowitz, D., Lin, C. and Y. Ma. 2015. “Do Property Rights Matter？ Evidence from a Property Law Enactment”, Journal of Financial Economics, 116(3):583～593.
[20]
Chu, Y. 2018. “Shareholder-Creditor Conflict and Payout Policy: Evidence from Mergers between Lenders and Shareholders”, The Review of Financial Studies, 31(8):3098～3121.
[21]
Ersahin, N., Irani, R., and K. Waldock. 2021. “Can Strong Creditors Inhibit Entrepreneurial Activity？”, The Review of Financial Studies, 34(4):1661～1668.
[22]
Fan, J. P. H., J. Huang, and N. Zhu. 2013. “Institutions, Ownership Structures, and Distress Resolution in China”, Journal of Corporate Finance, 23(4):71～87.
[23]
Ghoul, S. E., Guedhami, O., Kwok, C. Y., and Y. Zheng. 2021. “The Role of Creditor Rights on Capital Structure and Product Market Interactions: International Evidence”, Journal of International Business Studies, 52(1): 121～147.
[24]
Houston, J. F., C. Lin, P. Lin, and Y. Ma. 2010. “Creditor Rights, Information Sharing, and Bank Risk Taking”, Journal of Financial Economics, 96(3): 485～512.
[25]
John, K., Litov, L., and B.Yeung. 2008. “Corporate Governance and Risk-Taking”, The Journal of Finance, 63(4):1679～1728.
[26]
John, K., Kaviani, M. S, Lawrence, K, and M. Hosein. 2021. “Do Country-Level Creditor Protections Affect Firm-Level Debt Structure Concentration？”, Review of Finance, 25(6):1677～1725.
[27]
Kam, A., Citron, D., and G. Muradoglu. 2008. “Distress and Restructuring in China: Does Ownership Matter？”, China Economic Review, 19(4):567～579.
[28]
Knack, S. and P. Keefer. 1995. “Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures”, Economics and Politics, 7(3): 207～227.
[29]
La Porta, R. L., Lopez-de-Silanes, F., Shleifer, A., and R. W. Vishny. 1998. “Law and Finance”, Journal of Political Economy, 106(6):1113～1155.
[30]
Mann, W. 2018. “Creditor Rights and Innovation: Evidence from Patent Collateral”, Journal of Financial Economics, 130(1): 25～47.
[31]
Seifert, B., and H. Gonenc. 2012. “Creditor Rights and R&D Expenditures”, Corporate Governance: An International Review, 20(1):3～20.
[32]
Vig, V. 2013. “Access to Collateral and Corporate Debt Structure: Evidence from a Natural Experiment”, The Journal of Finance, 68(3):881～928.
