Property Rights, Finance, and Reinvestment: Evidence from China’s Private Enterprises

Abstract

The existing studies have failed to find conclusive results on the relative importance of property rights protection and access to external finance for enterprise reinvestment partly due to their lack of control for the endogeneity problems. In this study, using data of China’s private enterprises, we re-investigate this issue by carefully addressing the endogeneity issues. We find that property rights protection is more important for the reinvestment decision than the access to external finance. Our study demonstrates forcefully that, China is no different from other transition economies regarding the fundamental importance of property rights security to firm performance.