The Impact Of Security Interest System Reform On Firms' Debt Financing And Real Effects:Empirical Study Based On Natural Experiment Of Property Law

The market economy is essentially a law-based economy.China's economy has experienced a rapid growth and obtained remarkable achievements ever since the reforming and opening-up policy,but the financial development and legal system are still imperfect and limit the long-run economic growth.Under this background,the problems that puzzled many researchers and policymakers are how to improve the legal system to effectively promote the development of finance.As a breakthrough of security interest system in China,the Property Law enacted in 2007 becomes a basic part of the legal system.It is an undocumented academic issue that how firms respond to this legal reform on security interest system.However,there is less systemic evidence on it because of the limitation of data and method so far.In order to address this issue,this paper study how the reform worked and analyzes the financial and real effects it triggered in firm level.This paper reviews the relevant research on the original studies on law and finance,the cross-sectional studies on the relation between creditor rights and debt finance,and the empirical evidences from quasi-natural experiment of legal reform.Then,in order to lay the foundations for theoretical analysis and empirical examination,this paper analyzes the institutional background on the progress of Chinese security interest system from the perspectives of enlarging the menu of legal secured assets types and introducing efficient procedure of establishment and enforcement for security interest.By employing the different extent of legal reform takes effects and using the private owned listed firms' data,this paper constructs treated group and control group at firm assets structure level and uses the difference in difference method to identify the effects of the law on firms' debt financing,investment and default risk.Firstly,this paper examines the effect of the property law on debt financing by using difference in difference method.The evidences show that the reform led to a significant increase in firms' current liabilities and total debt,and these effects are more pronounced for firms with a lower proportion of fixed assets.Moreover,the evidences show that there are two unique characteristics of the mechanisms through which the law impacts corporate debt financing.On the one hand,the increase of current liabilities is dominated by the increase of trade credit.However,firms' short-term loan supplied by banks does not increase significantly after the legal reform.On the other hand,the long-term debt increases with a lag and the possible mechanisms are that the growth of trade credit relaxes firms' financial constraints and firms' sales growth and profitability,and then promote banks to increase their supply of long-term loans.Secondly,this paper considers how firms' investment responds to the legal reform.The evidences show that this reform increases both firms' investment and their sensitivity of investment to Tobin Q and ROA.Consistent to the theoretical assumption that the reform improves investment efficiency through alleviating financial constraints,further results show that the reform decreases firms holding of financial assets and the legal effect on investment efficiency is greater for those firms which have severer financial constraints or located at province with better institutional environment.Thirdly,from a perspective of the changing legal environment,this paper considers how the security interest system reform affects firm leverage and default risk.The empirical evidences show that the property law increases firms' leverage,and this effect is more pronounced for firms with lower proportion of fixed assets.Moreover,this paper chooses interest coverage and Z-score to measure firm default risk and the evidence shows that instead of push up firm's default risk,the legal reform strengthens firm ability to repay debt.The implication is that,due to the pareto improvement,the legal reform do not push up default risk while increase leverage.In the end,this paper concludes above results and provides policy suggestions according to the results.This paper help to identify the causal relationship between law and finance and clarify the financial effect and real effect of security interest system reform and its mechanism,hence has important implications for emerging market on how to promote the legal system environment to further improve financial development and economic growth.What's more,this paper provides implications for policymakers to cope with the “high leverage” and “deleverage” problems.