Essays on law and finance

Abstract

This thesis consists of three essays on law and finance. Exploiting the adoption of public regulations and security laws, the essays study whether and how political connection, shareholder litigation and minimum wage can influence corporate policies. The first essay evaluates the impact of a recent de-politicization reform in China: two years after the enactment connected firms lost their preferential access to external finance and sales (government contracts); and, they became more productive, innovative and transparent, and invested more efficiently, indicating that politically connected firms can quickly adjust to a de-politicization. In the second essay, I examine whether and to what extent shareholder litigation shapes corporate innovation using the staggered adoption of the universal demand (UD) laws in 23 states from 1989 to 2005. These laws impose obstacles against shareholders filing derivative lawsuits thereby significantly reducing a firm’s litigation risk. Following the passage of the UD laws, firms have invested more in R&D, produced more patents based on new knowledge and more patents in new technological classes, generated more patents that have a large number of citations, and achieved higher patent value. The third essay studies the effects of minimum wages (MWs) on corporate investment decisions using census data of Chinese manufacturing firms over the 1998-2008 period. In China, MW policies vary across more than 2,800 counties. We exploit the MW policy discontinuities at county borders and explore how MWs affect firms located around shared borders of any two adjacent counties that are subject to different MWs. We find that corporate investments increase as a result of MW hikes. The effect is stronger for firms that are labor-intensive, that cannot sufficiently pass labor cost on to consumers, that have better access to finance, and that are located in regions with better contract enforcement. Our findings are explained by a capital-labor substitution hypothesis: firms make more investments in fixed assets and adopt new technologies to offset growing labor costs caused by the higher wage floor. We also document a positive effect of MWs on long-term debts, suggesting the increase in investment is externally financed.