How Do Institutions Matter for Foreign Firms?
Simon Hartmann (Vienna University of Economics and Business)

Abstract : Confidence in institutions does vary among firms within and across countries. Impersonal relations on country level and ownership on firm level are important determinants of this heterogeneity. Based on more than 3,000 firms from up to 25 countries, we unbundle the effect of impersonal relations on confidence in property rights and contractual institutions. Our main finding is that with weak impersonal relations, foreign firms have significantly less confidence in institutions compared to private domestic firms. While generalized trust – the informal dimension of impersonal relations - is the dominant channel for differential property rights institutions, judicial independence - the formal dimension - turns out to have the same role for contractual institutions. The differences become insignificant at higher levels of impersonal relations. We provide several robustness checks addressing endogeneity, reporting bias and sample selection.

Transaction Costs and Economic Growth Under Common Legal System: State-level Evidence from Mexico
Mitja Kovac (University of Ljubljana Faculty of Economics)
Rok Spruk (University of Ljubljana faculty of Economics)

Abstract : This paper examines the contribution of administrative and procedural transaction costs to economic growth under common legal system. We show that administrative and procedural costs vary quite a lot even within the institutional environment sharing the common legal system. States with low-cost business registration, low-cost access to property rights and greater judicial efficiency tend to have consistently higher growth. The established effects are robust to alternative model specifications, heterogeneity bias, and to a variety of control variables that might confound the effects of transaction costs on growth. Such differences in transaction costs are far from being trivial as we show that these within-system differences might be instrumental in influencing economic growth. Lower transaction costs induce growth by increasing investment rate, lowering unemployment rate, encouraging labor supply and improving TFP. In the counterfactual scenario, the transition from high-cost to low-cost regime is associated with substantial growth and development gains over time. By exploiting the variation in historical presence of US troops in 1848, disease environment, ethnic fractionalization and historical urbanization, we show that the negative effect of rising transaction costs on growth and development appears to be causal.

The Effect of Property Rights Protection on Capital Structure: Evidence from a Chinese Natural Experiment
Yixin Liu (University of New Hampshire)
Yu Liu (University of Texas at Rio Grande Valley)
William Megginson (University of Oklahoma)
Zuabao Wei (University of Texas at El Paso)

Abstract : Little is known about how changes in property rights security impacts firm capital structure decisions. We examine this empirically by exploiting a natural experiment, the enactment of China’s Property Rights Law in 2007 (the Law). Using a large dataset of China’s non-listed firms, we document a significant decrease in leverage after the Law’s passage. This finding is consistent with the “reinvestment hypothesis” which stipulates that as property rights protection strengthens, firms are willing to reinvest more of their profits, thus leading to less use of external debts (Johnson, McMillan and Woodruff, American Economic Review, 2002). In subsample analyses, we find that financially constrained firms experience an increase in leverage relative to unconstrained ones following the Law’s enactment, as predicted by financial constraints theoretical models. Overall, our study finds that the Law has a significant impact on firm leverage decisions and that the Law is particularly important to financially constrained firms.