Transcript Alternative Legal Institutions, Xinfang and Finance

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.