Resolving Financial Distress Where Property Rights Are Not Clearly Defined: The Case of China
Abstract:
We use data on financially distressed Chinese companies in order to study an economy where property rights are inadequately defined and poorly enforced. To help with identification we use an event where a business-friendly province published new guidelines regarding the administration and enforcement of assets pledged as collateral. Though by no means a comprehensive reform of bankruptcy law or property rights, the new guidelines largely eliminated the high incidence of creditors runs, sharply increasing the proportion of defaulted firms emerging as going concerns. These results were achieved despite the fact that companies had no access to bankruptcy law, illustrating the value of enforcement of basic property rights. Our analysis and results challenge the view that a fully fledged system of private property is a precondition for economic development.