Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Alternative Legal Institutions, Xinfang and Finance Jiafu An, Jo Danbolt, Wenxuan Hou, and Ross Levine The University of Edinburgh; UC Berkeley Motivation: Literature • Legal institutions → Development of financial market (La Porta et al., 1997; 1998; 1999; 2000 and Beck, Demirgüç-Kunt & Levine, 2001; 2003) • Financial markets → Economic growth (Levine, 1993;1997) • Legal Institutions → Economic growth (Acemoglu, Johnson, Robinson, 2000; 2001; Nunn, 2008) Motivation: Challenge • Legal institutions are defined by western standards. • Challenge: Law-finance nexus may not apply to eastern countries such as China. (Allen, Qian and Qian, 2005; Clarke, Murrell, Whiting, 2008) Market Cap. of Listed Domestic Companies in 2014 30000 Billions US$ 25000 20000 15000 10000 5000 0 United States China Japan Canada Source: World Bank France Germany Motivation: Big Questions • Does legal system promote finance in eastern countries, such as China? • Why it does or does not? • Why, despite their weak legal institutions, some eastern countries still grow their financial markets at an enormous rate? Institutional Background: Definition • Xinfang: an alternative legal system deeply embedded in Chinese society since the first dynasty Xia (2070-1046 B.C.) • The xinfang system is broadly defined as a mechanism for citizens to resolve disputes, file complaints, and seek resolutions from government and its associations on higher administrative level. Institutional Background: Application Number of Legal and Xinfang Cases 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2004 2005 2006 2007 Legal Cases 2008 2009 Xinfang Cases 2010 2011 2012 Institutional Background: Distinction Consult laws, but sometimes disregard it based on current circumstance and state policy Xinfang Legal law, state policies, social norms, fair and justice required by the Constitutions of the Party. law Completely base on the legal rules Institutional Background: Distinction • The formal legal system (German civil law origin) was established by the end of the Qing dynasty (1912) • The xinfang system has always been there since 2000 years BC. • So attention should also be paid to the alternative legal systems. Hypotheses • Xinfang system → Development of financial market Property rights Xinfang Private contract Checks on government Finance Data: Xinfang • We hand-collect xinfang regulations of each province during 19932014. (because, and the process involves) • A xinfang regulation is a document describing the operation of xinfang in a province. • In total, we obtain 60 regulations covering 27 provinces in 1993-2014 (An, Hou, and Levine, 2016). Data: Coding • We take individual policies of provincial xinfang systems and construct measures of the functioning of each xinfang system in each year in four areas: • (1) the efficiency with which the xinfang system resolves cases (efficiency of dispute resolution) • (2) the degree to which the xinfang system has explicit checks on conflicts of interest on cases and formal oversight and review procedures of xinfang workers (dispute resolution mechanisms) Data: Coding • (3) the degree to which the xinfang system formally requires particular responses by xinfang workers to people filing a case (“xinfangers”) and does not constrain xinfangers from pursuing their cases (access support and restraints) • (4) the degree to which the xinfang system requires rewarding xinfangers for bringing socially beneficial cases and punishing xinfang workers who do not perform their jobs effectively and lawfully (punishment and reward). • In particular, we focus on 69 particular “policies”. (An, Hou, and Levine, 2016). Data: Financial Development Total capitalization Circulating cap. Trading volume No. of listed firms • the value of provincial equity market as a share of GDP • Rajan and Zingales, 1998; Allen, Qian, and Qian, 2005; LLSV, 1997 • the value of floating shares in provincial equity market as a share of GDP • the value of total trading volume of the provincial capital market as a share of GDP • Allen, Qian, and Qian, 2005 • the number of listed firms per million population in each province • Rajan and Zingales, 1998; LLSV, 1997 No. of IPOs • the number of IPOs per million population in each province • Rajan and Zingales, 1998; LLSV, 1997 Total loans • the value of total loans of banks as a share of GDP • Allen, Qian, and Qian, 2005 Other loans • the value of medium and long term loans of banks as a share of GDP Short loans • the value of short-term loans of banks as a share of GDP Findings • Xinfang system → Development of financial market • Xinfang-finance > in provinces with better formal legal institutions, less corruption and larger private economy. • Xinfang-finance > in industries with larger size of non-current assets; and more dependence on external finance • Xinfang-finance > in non-SOEs (more long term debt and investments) Contributions • We contribute to the law-finance-growth (La Porta et al., 1997; 1998; 1999; 2000 and Beck, Demirgüç-Kunt & Levine, 2001; 2003) by providing a novel dataset of legal system that is based on eastern standards. • This paper relates to the research on China (Allen, Qian and Qian, 2005; Clarke, Murrell, Whiting, 2008). We show that after considering the alternative legal system, the law-finance nexus does apply to China, which contradicts the evidence provided by previous research that ignores the alternative legal system. Contributions • We also provides an explanation of a long-standing puzzle that despite their weak legal institutions, some eastern countries can still grow their financial markets at an enormous rate. We show that alternative legal institutions that previously been ignored have a positive impact on financial market development.