Law and Finance in China: The Role of Xinfang

Prof. Hou is Chair in Corporate Finance at the University of Edinburgh Business School. He received his PhD from Manchester Business School and pursued executive education at Kellogg School of Management. He has served as an Associate Editor or Guest Co-editor of European Journal of Finance, Finance Research Letters, Corporate Governance: An International Review, International Small Business Journal and Journal of Business Ethics. ?His research interests cover corporate finance and governance, business ethics and financial markets. He has published 9 articles in FT45 or ABS-4* journals, 20 articles in 3* journals, 4 books with Palgrave Macmillan and 11 book chapters.

In this paper, we provide new data about a fundamental—if not the fundamental—formal institution in China for protecting private property and enforcing contracts and then use these data to reassess the law and finance view. Although largely ignored by western scholars, xinfang play a central role in protecting property rights, addressing contract disputes, and adapting to support a burgeoning array of commercial, corporate, and financial interactions. As a result, we develop (for the first time) measures of the cross-province effectiveness of xinfang institutions. Using a difference-in-differences methodology, we find that cross-province differences in xinfang are associated with cross-province, cross-industry, and cross-firm differences in corporate financing patterns that are consistent with key predictions from the law and finance view.