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Does the Rights Hypothesis Apply to China?

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  • Cheryl Xiaoning Long
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    Abstract

    Using firm-level data from a World Bank survey, this paper examines how legal development in China relates to various firm decisions. I find that a more active court system is associated with more investment, more adoption of technology, more innovation, and more complex transactions. Specifically, when a higher percentage of business disputes are resolved through the court system, firms tend to have higher investment rates, higher propensities to adopt new automated technology, and higher probabilities of developing new products. In addition, they tend to have more nonlocal sales. These findings are consistent with a sophisticated version of the rights hypothesis, in which the rule of law eventually replaces relation-based governance as a superior governance mechanism. I find two limitations of China’s legal system. The court system does a better job facilitating the growth of state-owned enterprises than of private firms, and it protects local firms better than nonlocal firms.

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    File URL: http://www.jstor.org/stable/full/10.1086/649031
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

    Volume (Year): 53 (2010)
    Issue (Month): 4 ()
    Pages: 629 - 650

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    Handle: RePEc:ucp:jlawec:doi:10.1086/649031

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    Web page: http://www.journals.uchicago.edu/JLE/

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    Cited by:
    1. Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
    2. Cull, Robert & Xu, Lixin Colin & Yang, Xi & Zhou, Li-An & Zhu, Tian, 2013. "Market facilitation by local government and firm efficiency : evidence from China," Policy Research Working Paper Series 6688, The World Bank.
    3. Ng, Travis, 2013. "Information acquisition and institutions: An organizational perspective," Information Economics and Policy, Elsevier, vol. 25(4), pages 301-311.
    4. Fan, Joseph P.H. & Gillan, Stuart L. & Yu, Xin, 2013. "Innovation or imitation?," Journal of Multinational Financial Management, Elsevier, vol. 23(3), pages 208-234.

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