Qing Xia

ESSAYS IN FINANCIAL ECONOMICS

Qing Xia

ESSAYS IN FIN

AN

CIAL ECO

NO

MICS

ISBN 978-91-7731-082-2

DOCTORAL DISSERTATION IN FINANCE STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018

Qing Xia

ESSAYS IN FINANCIAL ECONOMICS

Qing Xia

ESSAYS IN FIN

AN

CIAL ECO

NO

MICS

ISBN 978-91-7731-082-2

DOCTORAL DISSERTATION IN FINANCE STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018

Essays in Financial Economics

Qing Xia

Akademisk avhandling

som för avläggande av ekonomie doktorsexamen vid Handelshögskolan i Stockholm framläggs för offentlig granskning

fredagen den 9 november 2018, kl 15.15, Swedish House of Finance,

Drottninggatan 98, Stockholm

Essays in Financial Economics

Essays in Financial Economics

Qing Xia

Dissertation for the Degree of Doctor of Philosophy, Ph.D.in FinanceStockholm School of Economics, 2018

Essays in Financial Economicsc© SSE and Qing Xia, 2018

ISBN 978-91-7731-082-2 (printed)ISBN 978-91-7731-083-9 (pdf)

This book was typeset by the author using LATEX.

Front cover illustration:c© ilolab/Shutterstock.com, 2018

Printed by:BrandFactory, Goteborg, 2018

Keywords:Creditor Rights, Innovation, Collateral, China, Trust, Bond Covenants,Venture Capital, Entrepreneurship, College Attendance

iii

To Mengyi and Bo

Foreword

This volume is the result of a research project carried out at the Departmentof Finance at the Stockholm School of Economics (SSE).

This volume is submitted as a doctor’s thesis at SSE. In keeping withthe policies of SSE, the author has been entirely free to conduct and presenthis research in the manner of his choosing as an expression of his own ideas.

SSE is grateful for the financial support provided by the Bankforskn-ingsinstitutet which has made it possible to fulfill the project.

Goran Lindqvist Magnus DahlquistDirector of Research Professor and Head of the

Stockholm School of Economics Department of FinanceStockholm School of Economics

Acknowledgements

I would like to express my sincere gratitude to my supervisors Per Strombergand Laurent Bach for the continuous support during my Ph.D studies, fortheir patience, motivation and encouragement. I am particularly gratefulfor the full understanding and support of Laurent Bach when I have tomake hard choices because of all kinds of constrains that I came across. Ihave greatly benefited from the advice of Professor Per Stromberg for hiscontinuous encouragement, positive attitude and inspiring economic intu-ition during each and every discussion.

I also wish to thank the faculty members of the Swedish House of Fi-nance who helped me in various ways in my research and life. In particular,I have received insightful advice and help from Bo Becker and during my jobmarket. My sincere thanks also go to Ramin Baghai, Bo Becker, DanielMetzger and Paolo Sodini who gave me the opportunity as the teachingassistant of their courses. In addition, I would like to thank the admin-istrative team of the department who made my life and work in Swedenmuch easier and smooth.

I would also like to thank all my friends and fellow Ph.D. students atSSE and Stockholm University. Special thanks go to Jieying Li who isa wonderful coauthor and a friend always has time to talk; my cohort inthe PhD program: Rafael B. De Rezende, Adam Farago, Nikita Koptyug,Mariana Khapko and Tomas Thornqvist for their mutual support duringthese years we spent together.

I am also grateful for the financial support provided by the Bankforskn-ingsinstitutet (BFI) during my studies.

Last but not least, I will always be grateful to my friends and familyfor their unconditional love and encouragement during this process. I amdeeply thankful to my beloved wife Mengyi, and our lovely son, Bo. Bothof you make my life complete. I dedicate this thesis to you.

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Stockholm, October, 2018

Qing Xia

Contents

1 Creditor Rights and Innovation: Evidence from China 11.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 Institutional Context . . . . . . . . . . . . . . . . . . . . . . 7

1.2.1 Pre-Property Law Creditor Rights . . . . . . . . . . . 71.2.2 How does the New Law Change Creditor Rights? . . 81.2.3 Is the New Law Anticipated? . . . . . . . . . . . . . 9

1.3 Hypothesis Development . . . . . . . . . . . . . . . . . . . . 91.3.1 Impact of the Reform on Financing . . . . . . . . . . 101.3.2 Impact of the Reform on Investment . . . . . . . . . 111.3.3 Impact of the Reform on Innovation . . . . . . . . . . 12

1.4 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . 131.5 Data and Sample . . . . . . . . . . . . . . . . . . . . . . . . 15

1.5.1 Chinese Patent Data . . . . . . . . . . . . . . . . . . 151.5.2 Unavailable Land Data . . . . . . . . . . . . . . . . . 161.5.3 Firm Level Data . . . . . . . . . . . . . . . . . . . . 171.5.4 Univariate Analysis . . . . . . . . . . . . . . . . . . . 181.5.5 Geographic Motivation . . . . . . . . . . . . . . . . . 18

1.6 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . 191.6.1 Capital Structure and Cash Holdings . . . . . . . . . 191.6.2 Investments . . . . . . . . . . . . . . . . . . . . . . . 211.6.3 Innovation . . . . . . . . . . . . . . . . . . . . . . . . 211.6.4 Exploring Cross-Sectional Heterogeneity . . . . . . . 22

1.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Figures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

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2 Trust and Use of Covenants 472.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 472.2 Theoretical Motivation . . . . . . . . . . . . . . . . . . . . . 51

2.2.1 What is Trust? . . . . . . . . . . . . . . . . . . . . . 512.2.2 How does Trust Affect Contracts? . . . . . . . . . . . 52

2.3 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . 532.3.1 Methodology . . . . . . . . . . . . . . . . . . . . . . 53

2.4 Data and Variables . . . . . . . . . . . . . . . . . . . . . . . 542.4.1 Bond Covenants . . . . . . . . . . . . . . . . . . . . . 552.4.2 Empirical Measures of Trust . . . . . . . . . . . . . . 552.4.3 Other Control Variables . . . . . . . . . . . . . . . . 572.4.4 Descriptive Statistics . . . . . . . . . . . . . . . . . . 57

2.5 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . 592.5.1 Multivariate Analysis . . . . . . . . . . . . . . . . . . 592.5.2 Trust and the Use of Specific Types of Covenants . . 602.5.3 Other Contracting Terms . . . . . . . . . . . . . . . . 612.5.4 The Quality of Legal Enforcement . . . . . . . . . . . 612.5.5 Repeated Interaction–proof reading stops here . . . . 612.5.6 Heckman Selection . . . . . . . . . . . . . . . . . . . 622.5.7 Further Robustness Checks . . . . . . . . . . . . . . 632.5.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . 64

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

3 Attract the talents back: the impact of returnee entrepreneurson Venture Capital investments 913.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 923.2 Data and sample . . . . . . . . . . . . . . . . . . . . . . . . 973.3 Stylized facts of Chinese VC investments . . . . . . . . . . . 98

3.3.1 Exit performance . . . . . . . . . . . . . . . . . . . . 993.3.2 Investment behavior and entrepreneur-VC matches . 101

3.4 Policy to attract highly-talented emigrants . . . . . . . . . . 1043.5 Empirical analysis and results of the policy . . . . . . . . . . 106

3.5.1 Overall effect of the policy on VC investments in China1063.5.2 Investment preference of VC investors: returnee VS

local . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

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3.5.3 The heterogeneous impacts of the policy on entrepreneurialfinancing for local startups . . . . . . . . . . . . . . . 110

3.6 Discussion and Conclusion . . . . . . . . . . . . . . . . . . . 112References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119Figures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

4 Credit Constraint and College Attendance 1414.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 1414.2 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . 1434.3 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . 1464.4 Data and Sample . . . . . . . . . . . . . . . . . . . . . . . . 1484.5 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . 150

4.5.1 The Association between Housing Wealth and Col-lege Attendance . . . . . . . . . . . . . . . . . . . . . 150

4.5.2 Instrumental Variables Results . . . . . . . . . . . . . 1524.6 Conclusion and Policy Implication . . . . . . . . . . . . . . . 154References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159Figures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169