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How Property Rights Matter to Firm Resource Investment: Evidence from China’s Property Law Enactment

Author

Listed:
  • Wenlong He

    (Renmin Business School, Renmin University of China, Beijing 100872, China)

  • Tony W. Tong

    (Leeds School of Business, University of Colorado, Boulder, Colorado 80309)

  • Mingtao Xu

    (School of Economics and Management, Tsinghua University, Beijing 100084, China)

Abstract

Although property-rights theory has long been used to explain firms’ ownership of resources, research on the channels through which property rights affect heterogeneous firms’ investment in building resources remains scarce. Leveraging a property-law enactment in China, we find that strengthening property-rights protection leads private firms to make greater intangible and tangible asset investment compared with state-owned firms and that these effects are mediated by external equity and debt financing. Further, we unpack resource heterogeneity by explicating key differences between intangible and tangible assets, and we document an alignment between asset intangibility and financing approaches such that for intangible asset investment, equity plays a larger mediation role, whereas for tangible asset investment, debt’s mediating effect is greater. We contribute to the strategy literature by using property-rights theory to link together asset intangibility and financing approaches and by showing that the strength of property-rights protection affects firms’ resource investment and shapes firm heterogeneity.

Suggested Citation

  • Wenlong He & Tony W. Tong & Mingtao Xu, 2022. "How Property Rights Matter to Firm Resource Investment: Evidence from China’s Property Law Enactment," Organization Science, INFORMS, vol. 33(1), pages 293-310, January.
    • Handle: RePEc:inm:ororsc:v:33:y:2022:i:1:p:293-310
    DOI: 10.1287/orsc.2020.1418
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