Property Rights Protection and Investment: a Natural Experiment from China

This paper utilizes a natural experiment to examine the role of the protection of property rights in promoting investment. In order to explore a title-granting scheme in Shenzhen, China, I collect a sample of 83 listed SOE firms, with 32 of them holding about-to-be-entitled lands. Those landholders exhibit both a sharp short-term 7:8% additional increase in stock market price and a long-term 63% extra increase in investment, when compared with non-landholders, despite that there is no pre-event structural difference between the two. These increases in value are a result of having solved hold-up problems rather than a result of increased collateral values because those politically connected SOEs under analysis are financially unconstrained.
Cross-sectionally, those firms with weaker pre-event protection against hold-up are associated with greater increases in share price and investment. Potentially, solving the hold-up problem of all unentitled land would bring about value of 2:2 Trillion RMB, almost triples Shenzhen's GDP in 2009.