The Impact And Mechanism Of Contract Enforcement On Firm Investment

In recent years,China has been standardizing and accelerating the law and policy of enterprises.In June 2007,the Central Economic Working Conference proposed that one of the key points of "supply side"reform is to" cut overcapacity" and "the disposal of zombie enterprises" is a priority.In order to achieve the goal,the authorities should "create conditions for the implementation of market-based bankruptcy procedures and speed up the trial of bankruptcy liquidation cases".This kind of legal reform can indeed solve the social problems such as overcapacity,however,how it will affect the enterprises at the micro level is a topic worth studying.Based on the fact that there is a huge difference between law enforcement and government efficiency,this paper analyzes the impact of contract enforcement on firm investment using the data of Chinese A-Share listed firms during the period of 2001-2015.Based on the analysis of how contract enforcement influences firm investment,we then include financial constraint,corporate governance and firm character into the framework and focus on the micro-mechanism.The empirical results show that contract enforcement has a positive effect on firm investment through the channels of external financing environment,internal corporate governance framework as well as probability of default.Contract enforcement may have a greater promotion on firm investment for state-owned or political connected firms.The conclusions of this study informs the debate on the sequencing of economic reforms.During the process of economic reforms,scholars used to focus on the improvement of articles of law,while neglect the role of legal environment.Our research shows that the efficient contract enforcing environment is a prerequisite for companies to benefit from reform.Thus,finding the right balance between promoting necessary changes in legal rules and investing to make the judicial institutions in charge of enforcing them more efficient is one of the major challenges faced by governments in developing countries.