آیا محافظت از حقوق مالکیت بر استراتژی مدیریت ریسک شرکت موثر است؟ شواهد از کشور داخلی و کشور متقابل

Recent studies in the law and finance literature have shown that property rights protection is central to corporate financing and investment decisions and economic growth at large. We extend this literature by examining the effect of property rights security on corporate risk management decisions — an important element of a firm's business strategy. Using a unique dataset covering over 55,000 Chinese firms and employing both institution- and firm-level measures of property rights security, we find that secure property rights lead to higher corporate demand for property insurance, suggesting that property rights security is an important determinant of corporate risk management decisions. The effect of property rights protection on insurance consumption is also validated by a cross-country analysis that uses data from 93 countries over the period 1995–2008. Our study sheds light on the importance of property rights protection to corporate risk management decisions.

Property rights are a fundamental concept in the economics and finance literature. As pointed out by Levine (p.61, 2005), “the security of property rights … is not a natural occurrence; rather it is an outcome of policy choices and social institutions.” Recent studies show that good legal environments that provide strong property rights protection and contract enforcement reduce cost of capital, enhance corporate governance, firm valuation, reinvestment rates, assets allocation, corporate innovation, firm growth and thereby economic growth (e.g., Acemoglu et al., 2001, Acemoglu and Johnson, 2005, Beck et al., 2003, Beck et al., 2005, Besley, 1995, Chen et al., 2009, Claessens and Laeven, 2003, Cull and Xu, 2005, Johnson et al., 2002, La Porta et al., 1998, La Porta et al., 2002, Lin et al., 2010 and Shleifer and Wolfenzon, 2002). Using a unique large corporate property insurance dataset covering more than 55,000 manufacturing firms in China and following the framework of Cull and Xu (2005) and Levine (2005), we add to this line of research by empirically testing the effect of property rights security on corporate risk management — an important element of a firm's overall business strategy (Guay and Kothari, 2003, p.423) but has been generally neglected so far in the law and finance literature. Bankruptcy is one of the major risks facing businesses and their investors and hence corporate risk management is of paramount importance in preventing financial distress and bankruptcy. The study also adds to the existing literature of corporate risk management. The extant literature strives to explain why firms undertake risk management activities since risk management should be irrelevant in a classic Modigliani and Miller (M&M) world without market imperfections. In the real world with market imperfections, scholars have identified several important determinants of corporate risk management activities such as the expected cost of financial distress (e.g., Mayers and Smith, 1982 and Smith and Stulz, 1985), tax incentives (e.g., Frestad, 2010, Mayers and Smith, 1982 and Smith and Stulz, 1985), underinvestment and predation risk (e.g., Froot et al., 1993 and Haushalter, 2000), and managerial risk aversion (e.g. Smith and Stulz, 1985). Our study adds to this strand of literature by showing, for the first time, that property rights security is a new important determinant of corporate risk management decisions. By doing so, it also contributes to the broader corporate hedging and risk management literature, which examines the causes and consequences of various hedging mechanisms such as financial derivatives and corporate cash holdings (e.g., Fauver and Naranjo, 2010, Kuersten and Linde, 2011 and Kusnadi and Wei, 2011). Due to scarcity of data on corporate use of insurance, the corporate risk management literature normally takes the use of derivatives as a proxy for corporate hedging.1 The existing corporate risk management literature assumes that firms use derivatives purely for hedging purposes (Guay and Kothari, 2003). However, managers may also engage in selective hedging or speculation with derivatives though this is rarely successful. Géczy et al. (2007) report that investors often are unable to discern the speculation activities from the financial disclosures. Unlike derivatives, insurance cannot be used for speculation and therefore it provides a cleaner testing ground for the relation between property rights security and corporate risk management (Adams et al., 2008 and Aunon-Nerin and Ehling, 2008). As pointed out by MacMinn and Garven (2000), insurance represents a simple and widely used corporate risk management tool and the corporate property–casualty insurance (P/C insurance) premiums typically exceed dividend payments by an order of 30–40%. In 2004, property–casualty insurance premiums amounted to US$1395 billion globally. Indeed, Mayers and Smith (1982) and Smith (1986) conclude that insurance is an integral part of corporate financial policies. As such, evidence on the linkage between property rights security and corporate insurance is of significant managerial and policymaking implications. There is a close theoretical linkage between corporate risk management via insurance purchases and property rights security. Corporate insurance is a contractual transfer of risks where the insurer agrees to reimburse the insured firm losses arising from specified accidental events (e.g., a fire). Property rights protection provides firms with the right to own assets, to benefit from the income generated from those assets, to dispose of the assets, and to seek compensation for any damages to such assets caused by third parties. The value of the insurance contract thus hinges on the degree of property rights protection afforded by legal rules and contract enforcement. Moreover, secure property rights lead to more corporate investments and thereby better growth opportunities (Besley, 1995 and Cull and Xu, 2005) and this further provides a rationale for corporate risk management (e.g., via insurance) in order to mitigate the underinvestment problem (Froot et al., 1993). The important linkage between property rights security and insurance purchase, however, has rarely been tested, due to the paucity of corporate insurance data. Using a country-level dataset, Esho et al. (2004) is the only study that shows a positive relation between a country's protection of property rights and its aggregate property–casualty insurance consumption. Our study is the first to examine the relation between variations in property rights security and the purchase of insurance at the firm-level. This is important as Beck et al. (2006) argue that one needs to control for firm-specific characteristics to draw appropriate inferences about the relationship between institutions and firm behavior (e.g., risk management in our case). China represents a unique environment within which to investigate the relation between property rights and corporate insurance because of the following salient features. First, property insurance is a common and major commercial risk management tool for companies in China because of the general lack of risk management expertise among Chinese firms and/or the relatively low safety standard.2 By purchasing an insurance policy, the insured firm not only obtains loss coverage but also the insurer's services on loss prevention and control. According to Swiss Re (2004), property–casualty insurance premiums in China amounted to US$16.77 billion in 2004, with roughly 65% derived from corporate purchases. Second, while extant risk management studies typically examine either corporate use of derivatives or insurance in managing risks, we recognize that firms may manage overall risks in a coordinated way with more than one commercial tool (e.g., both insurance and derivatives uses). Failure to take account of the interaction among different risk management tools may lead to a biased inference on the effect of using a particular tool (Allayannis and Weston, 2001). This possibility, however, is minimized in China because China does not have developed financial derivatives markets. Therefore, in this regard, China represents a cleaner setting for our investigation. Third, more importantly, information on corporate purchase of property insurance is a standard expenditure item in the internal accounting books of China's manufacturing firms and was disclosed via the First Economic Census conducted in 2005. Such information is thus highly reliable and not subject to the biases associated with subjective survey data (Bertrand and Mullainathan, 2001). The unique Chinese insurance data thus provide a unique opportunity to explore the effects of property rights security on corporate risk management via insurance use. Fourth, China is a large and diverse country with substantial disparity in the levels of economic and institutional development (including contract enforcement, investor protection and the effectiveness and efficiency of the judicial system) across different regions. Our data show significant variations in the incidence and extent of corporate insurance among firms in different regions. In addition, Cull and Xu (2005) argue that one important aspect of property rights is corporate ownership. China is rich in various types of corporate ownership (e.g., state, private, and foreign ownership). Another element of the corporate reform in China is to allow and to encourage the development of private economy, particularly in industries subject to fierce market competition (Cull and Xu, 2005). These private firms are likely to be more efficient as they do not have the soft budget constraints (Adams et al., 2011). As documented in Allen et al. (2005) and Firth et al. (2009), private firms now play a very important role in the economy. The rich variety of corporate ownership in China thus enables us to examine how state-owned and private firms that have different levels of property rights security are different in their risk management strategy.3 Finally, corporate risk management theories posit a close linkage between debt financing, investment and insurance (Campello et al., 2011). Insurance as a post-loss financing mechanism can help coordinate a firm's financing and investment decisions (Froot et al., 1993, Mayers and Smith, 1982 and Mayers and Smith, 1987). For example, the existence of an appropriate insurance program can provide cash flow hedging and help minimize the chance that investment in positive net-present-value (NPV) projects would have to be forgone or scaled down following a major accidental asset loss. Chinese firms (particularly unlisted firms) rely heavily on indirect debt financing (e.g., bank loans) as equity and bond markets are heavily regulated in China (Zou and Adams, 2008). While the state-dominated banking sector directs a disproportionate amount of bank loans to SOEs, Allen et al. (2005) find that bank loan also represents an important (and relatively low-cost) source of financing to private firms, particularly during the start-up period. They also report that the deals between banks and private firms are often of arm's length (e.g., in terms of collateral requirement). Zou and Adams (2008) report that (listed) firms often take out property insurance in order to secure bank loans and/or to lower the cost of borrowing in China. Therefore, debt financing and property insurance on collateral and other physical assets is likely to be a strategic issue in management decision-making for both SOEs and private firms in China. Following the recent literature (e.g., Cull and Xu, 2005, Johnson et al., 2002 and Levine, 2005) on the role of property rights security on corporate financial decisions, we measure property rights security at both the institution- and firm-levels, and by different proxies. Following the Levine (2005), the property rights protection can be categorized into two important aspects (p.61, Levine, 2005): “1) an active government that enforces property rights, facilitates private contracting, and applies the law fairly to all, and 2) a government sufficiently constrained that it cannot engage in coercion and expropriation.” We measure the former dimension by a regional property rights protection index developed by the World Bank based on an economy-wide firm-level survey on investment climate and competitiveness in China (hereafter as the “World Bank Survey 2006”).4 This index measures the likelihood that the (local) legal system will uphold business contracts and property rights in business disputes in 2004, and is constructed separately for 120 major cities in China. Given the unbalanced economic developments across regions in China, this index exhibits significant variations across the cities in our sample.5 In addition to contract enforcement and protection, Levine (2005) further posits that the operation and development of financial markets facilitates investor and creditor protection and therefore directly reflects the effectiveness of property rights protection. We thus adopt a 2003 NERI (National Economic Research Institute of China) provincial banking-sector marketization index (reported in Fan et al. (2006)) as another proxy.6 Where the extent of marketization in the banking sector is high, property rights are more likely to be respected and safeguarded. Specifically, banks have more incentives to ask for collateral and property insurance to retain the value of collateral in granting loans. We use a 2003 NERI provincial index on reducing non-tax levies and charges (Fan et al., 2006) as an inverse proxy for government expropriation risk in China. Non-tax levies and charges arbitrarily imposed by various government departments are common ways of government expropriation and/or rent-seeking by corrupt officials and can lower the security of property rights. In addition, we use the city-level index of bank lending corruption index (from the World Bank Survey 2006) to measure the expropriation risk and rent seeking by corrupt bank officials. The index measures the level of expected informal payments firms have to pay in order to obtain bank loans in 2004. If corruption in the financing environment is pervasive, property rights and measures to safeguard property rights (e.g., insurance of collateral in bank loans) could be neglected in credit rationing and allocation. Therefore, corruption in lending can be viewed as an integral part of property rights measures, which has been shown to be of importance to external financing and firm growth ( Beck et al., 2005 and Demirguc-Kunt and Maksimovic, 1998). Moreover, following Cull and Xu (2005) and Lin et al. (2010), we use various types of corporate ownership (i.e. State vs. Private) to measure the security of property rights. State ownership is particularly prevalent in China while private ownership is playing an increasingly important role in the national economy. State ownership is often linked to poor property rights because of the vague ownership and control, the higher likelihood of government intervention, and the pursuit of multiple objectives for political interests (Cull and Xu, 2005 and Lin et al., 2010). We therefore hypothesize that SOEs that are associated with a lower level of property rights security have a lower demand for property insurance, other things being equal. Our tests of the relation between property rights security and corporate purchase of property insurance suggest that: a) firms located in regions with a higher property rights protection index, a lower government expropriation risk, and/or a more market-oriented banking sector are more likely to insure their assets and purchase more insurance; b) a higher proportion of state (private) ownership tends to be associated with a lower (higher) incidence and extent of insurance use; and c) in areas with relatively poor property rights protection, corruption in bank lending seems to have a negative effect on corporate demand for insurance. Our tests also suggest that the strength of the property rights protection afforded by the local legal system seems to have a first-order effect on corporate demand for property insurance, while the effects of other institution- and firm-level property rights proxies are conditional on a region's overall protection of property rights. One may argue that in addition to the lower level of property rights security in SOEs, the potential access to state contingent financing by SOEs may also lead to a lower demand for property insurance. However, when we repeat our analysis using only private firms that should not have access to state contingent financing and so presumably are a cleaner sample than SOEs, our results regarding institution-level property rights protection remain robust. To generalize our findings and examine the issue in a broader context, we examine the property rights — insurance link in an international context using country-level data from 93 countries over the period 1995–2008. Our cross-country analysis using aggregate insurance spending suggests a strong and positive association between property rights protection and the purchase of P/C insurance. Overall, these findings are consistent with the notion that the degree of property rights security is an important factor that shapes risk management strategy. The other parts of the paper are organized as follows. Section 2 discusses the linkage between property rights security and corporate risk management via insurance. Section 3 describes the research design. Section 4 discusses the results from the intra-country analysis. Section 5 provides a cross-country analysis of insurance purchase and property rights protection, and Section 6 concludes the paper.

Taking advantage of a large and unique firm-level dataset on corporate insurance that is recently available from China's first economic census, this study empirically tests the effects of property rights security on the corporate risk management via insurance use. Following the recent literature (e.g., Cull and Xu, 2005 and Levine, 2005), we measure property rights security at both the institution- and firm-level. We obtain the following results. First, firms located in regions with better property rights protection, lower government expropriation risk, and/or a more market-oriented banking sector, have more incentives to insure their assets. Second, relative to private ownership, state ownership tends to be associated with a lower incidence and extent of insurance use. Third, in areas with a lower-than-sample-median index of property rights protection, corruption in bank lending seems to have a negative effect on corporate demand for insurance, and reducing non-tax levies & charges does not increase corporate demand for insurance. Our tests also suggest that the strength of the property rights protection afforded by the local legal system has a first-order effect on corporate demand for property insurance, while the effects of other institution- and firm-level property rights proxies are conditional on a region's overall protection of property rights. Our results regarding institution-level property rights protection are robust to limiting the analysis to privately controlled firms that are a cleaner sample for testing the effects of property rights protection on corporate purchase of property insurance. The importance of property rights protection is further underpinned by our cross-country results from using 93 countries for the period 1995–2008. Overall, these findings are consistent with the notion that the degree of property rights security is an important determinant of corporate insurance decisions. Our study represents the first study focusing on the important relation between property rights security and corporate risk management. The documented evidence adds to the expanding body of research on the importance of property rights and investor protection to corporate financial decisions. Prior studies (Allayannis and Weston, 2001, Mayers and Smith, 1982, Smith and Stulz, 1985, Zou, 2010 and Zou and Adams, 2008) have shown both theoretically and empirically that corporate risk management can be value increasing in the presence of market imperfections, for example, via coordinating a firm's financing and investment decisions. An important policy implication of our results is that weak property rights protection also hurts firms (the basic economic units) and their investors by inhibiting their use of corporate risk management in coordinating firms' financing and investment decisions. This should ultimately compromise a country's economic growth. Future study should benefit from examining the effect of property rights security and corporate derivative hedging when reliable derivatives data are available.