Financial distress and innovation: Evidence from the Enterprise Bankruptcy Law

YANG Jialun; WANG Yintian

doi:10.16511/j.cnki.qhdxxb.2022.21.045

PDF(1274 KB)

Journal of Tsinghua University(Science and Technology) ›› 2023, Vol. 63 ›› Issue (9) : 1452-1466. DOI: 10.16511/j.cnki.qhdxxb.2022.21.045

ECONOMIC AND PUBLIC MANAGEMENT

Financial distress and innovation: Evidence from the Enterprise Bankruptcy Law

{{article.zuoZhe_EN}}

Author information +

History +

Abstract

[Objective] Traditional social concepts still hold certain negative views and stereotypes about bankruptcy. After the implementation of the Enterprise Bankruptcy Law in China in 2007, the positive role of the bankruptcy system and the impact of creditor protection are still not fairly understood. Until now, no literature has systematically analyzed and studied the effect of the Enterprise Bankruptcy Law on the innovative behavior of enterprises in financial distress. In fact, only a few quantitative analyses of the economic effects of implementing the Enterprise Bankruptcy Law have been found. This study examines the impact of the Enterprise Bankruptcy Law implementation on firm innovation and finds an increase in patent activity for firms in financial distress following the implementation of the law, thereby filling a gap in the literature on law and finance. [Methods] The 2007 Enterprise Bankruptcy Law is used as a quasi-natural experiment to construct a difference-in-difference model, as the model is intended to net out the common trend between the treatment and control firm groups. This study takes Merton's option pricing theory as the theoretical foundation of the credit monitor model and gauges the degree of financial distress faced by enterprises by calculating their distance to default. Based on the financial distress level faced by sample firms in 2006, the year before implementing the Bankruptcy Law, the firms are grouped by the annual median level of financial distress. However, firms with high financial distress typically differ from those with low financial distress in terms of other company characteristics, which could lead to concerns about missing variables. This paper introduces a propensity score matching method based on the difference model and selects four firms in the control group that belong to the same industry and have the closest propensity scores to those in the treatment group to effectively eliminate this concern. The estimation of the trend-matching scoring is performed using logical regression, and the sample set has passed the balance test. Furthermore, multistage dynamic regressions are employed to account for the interference of causal issues with the results. In addition, a volatility indicator based on the three-factor model is used to assess a firm's risk bearing to study the channel through which the Enterprise Bankruptcy Law influences firm innovation. [Results] After the implementation of the Enterprise Bankruptcy Law, the results revealed the following: 1) The number of patent applications of the experiment group increased by 18.77%, and the number of invention patent applications increased by 25.86% compared with the control group. 2) The implementation of the Enterprise Bankruptcy Law has strengthened the protection of creditors and thus improved the level of firm risk bearing, which has significantly increased innovation output and innovation quality of financially-distressed firms. 3)The above phenomena are more pronounced in firms with good corporate governance in regions with strict rules of law and strong intellectual property protection. [Conclusions] This study confirms the effect of creditor protection on business innovation. The introduction of the Enterprise Bankruptcy Law has enhanced the legitimate rights and interests of creditors in China, provided a strong guarantee for creditors to obtain potential repayment, enhanced the risk tolerance of firms, and encouraged firms to innovate. This study reveals the far-reaching effects of the legal system on the real economy and expands our knowledge of how the legal system environment influences enterprise innovation.

Key words

corporate innovation / financial distress / the Enterprise Bankruptcy Law / creditor protection

Cite this article

EndNote

Ris (Procite)

Bibtex

Download Citations

YANG Jialun, WANG Yintian. Financial distress and innovation: Evidence from the Enterprise Bankruptcy Law[J]. Journal of Tsinghua University(Science and Technology). 2023, 63(9): 1452-1466 https://doi.org/10.16511/j.cnki.qhdxxb.2022.21.045

References

[1] 全国人民代表大会常务委员会. 中华人民共和国企业破产法[EB/OL]. (2006-08-27)[2022-11-17]. http://www.npc.gov.cn/npc/c198/200608/82c5645b09b24b5ebefe76e365db72c9.shtml. National People's Congress. Enterprise bankruptcy law of the People's Republic of China[EB/OL]. (2006-08-27)[2022-11-17]. http://www.npc.gov.cn/npc/c198/200608/82c5645b09b24b5ebefe76e365db72c9.shtml. (in Chinese)
[2] JENSEN M C, MECKLING W H. Theory of the firm: Managerial behavior, agency costs and ownership structure[J]. Journal of Financial Economics, 1976, 3(4): 305-360.
[3] GREEN R C, TALMOR E. Asset substitution and the agencycosts of debt financing[J]. Journal of Banking & Finance, 1986, 10(3): 391-399.
[4] 姚洋, 章奇. 中国工业企业技术效率分析[J]. 经济研究, 2001(10): 13-19, 28. YAO Y, ZHANG Q. An analysis of technological efficiency of Chinese industrial firm[J]. Economic Research Journal, 2001(10): 13-19, 28. (in Chinese)
[5] BOOYENS I. Are small, medium-and micro-sized enterprises engines of innovation? The reality in South Africa[J]. Science and Public Policy, 2011, 38(1): 67-78.
[6] 董小英, 蒋贵凰, 刘倩倩. 知识管理提升企业创新能力的实证研究[J]. 清华大学学报(自然科学版), 2006, 46(S1): 956-963. DONG X Y, JIANG G H, LIU Q Q. Knowledge management increases innovation capability of enterprises: An empirical study[J]. Journal of Tsinghua University (Science & Technology), 2006, 46(S1): 956-963. (in Chinese)
[7] HE J, TIAN X. The dark side of analyst coverage: The case of innovation[J]. Journal of Financial Economics, 2013, 109(3): 856-878.
[8] AGHION P, VAN REENEN J, ZINGALES L. Innovation and institutional ownership[J]. American Economic Review, 2013, 103(1): 277-304.
[9] FANG V W, TIAN X, TICE S. Does stock liquidity enhance or impede firm innovation?[J] The Journal of Finance, 2014, 69(5): 2085-2125.
[10] HIRSHLEIFER D, LOW A, TEOH S H. Are overconfident CEOs better innovators?[J] The Journal of Finance, 2012, 67(4): 1457-1498.
[11] HUANG Z K, PHILLIPS G M, YANG J L, et al. Education and innovation: The long shadow of the cultural revolution[R]. Cambridge, USA: NBER, 2020.
[12] BÉNABOU R, TICCHI D, VINDIGNI A. Religion and innovation[J]. American Economic Review, 2015, 105(5): 346-351.
[13] LA PORTA R, LOPEZ-DE-SILANES F, SHLEIFER A, et al. Law and finance[J]. Journal of Political Economy, 1998, 106(6): 1113-1155.
[14] RAJAN R G, ZINGALES L. Financial dependence and growth[J]. American Economic Review, 1998, 88: 559-586.
[15] LAPORTA R, LOPEZ-DE-SILANES F, SHLEIFER A, et al. The quality of government[J]. Journal of Law, Economics and Organization, 1999, 15(1): 222-279.
[16] BROWN J R, MARTINSSON G, PETERSEN B C. Law, stock markets, and innovation[J]. The Journal of Finance, 2013, 68(4): 1517-1549.
[17] KERR W R, NANDA R. Financing innovation[J]. Social Science Electronic Publishing, 2014, 7(1): 445-462.
[18] FANG L H, LERNER J, WU C P. Intellectual property rights protection, ownership, and innovation: Evidence from China[J]. The Review of Financial Studies, 2017, 30(7): 2446-2477.
[19] 倪骁然, 朱玉杰. 劳动保护、劳动密集度与企业创新——来自2008年《劳动合同法》实施的证据[J]. 管理世界, 2016(7): 154-167. NI X R, ZHU Y J. Labor protection, labor intensity and enterprise innovation-evidence from the implementation of the Labor Contract Law in 2008[J]. Management World, 2016(7): 154-167. (in Chinese)
[20] 潘越, 潘健平, 戴亦一. 公司诉讼风险、司法地方保护主义与企业创新[J]. 经济研究, 2015, 50(3): 131-145. PAN Y, PAN J P, DAI Y Y. Litigation risk, judicial local protectionism and innovation[J]. Economic Research Journal, 2015, 50(3): 131-145. (in Chinese)
[21] 温军. 法律、投资者保护与企业自主创新[J]. 当代经济科学, 2011, 33(5): 50-58. WEN J. Law, legal protection of investors and enterprise innovation[J]. Modern Economic Science, 2011, 33(5): 50-58. (in Chinese)
[22] 姜军, 申丹琳, 江轩宇, 等. 债权人保护与企业创新[J]. 金融研究, 2017(11): 128-142. JIANG J, SHEN D L, JIANG X Y, et al. Creditor protection and corporate innovation[J]. Journal of Financial Research, 2017(11): 128-142. (in Chinese)
[23] BROCKMAN P, UNLU E. Dividend policy, creditor rights, and the agency costs of debt[J]. Journal of Financial Economics, 2009, 92(2): 276-299.
[24] COLE R A, TURK-ARISS R. Legal origin, creditor protection and bank lending: Evidence from emerging markets[EB/OL]. (2008-04-04)[2022-12-04].https://mpra.ub.uni-muenchen.de/8085/1/Legal_Origin_Creditor_Protection_and_Bank_Lending_2008-03-18.pdf.
[25] ACHARYA V V, SUNDARAM R K, JOHN K. Cross-country variations in capital structures: The role of bankruptcy codes[J]. Journal of Financial Intermediation, 2011, 20(1): 25-54.
[26] FAN W, WHITE M J. Personal bankruptcy and the level of entrepreneurial activity[J]. The Journal of Law and Economics, 2003, 46(2): 543-567.
[27] MANSO G. Motivating innovation[J]. The Journal of Finance, 2011, 66(5): 1823-1860.
[28] SEIFERT B, GONENC H. Creditor rights and R&D expenditures[J]. Corporate Governance, 2012, 20(1): 3-20.
[29] ACHARYA V V, AMIHUD Y, LITOV L. Creditor rights and corporate risk-taking[J]. Journal of Financial Economics, 2011, 102(1): 150-166.
[30] DJANKOV S, MCLIESH C, SHLEIFER A. Private credit in 129 countries[J]. Journal of Financial Economics, 2007, 84(2): 299-329.
[31] HOUSTON J F, LIN C, LIN P, et al. Creditor rights, information sharing, and bank risk taking[J]. Journal of Financial Economics, 2010, 96(3): 485-512.
[32] 杨伽伦, 朱玉杰, 盛大林. 大学、公司创新与地理距离——来自中国的证据[J]. 投资研究, 2020, 39(1): 19-38. YANG J L, ZHU Y J, SHENG D L. University, corporate innovation and geographical distance: Evidence from China[J]. Review of Investment Studies, 2020, 39(1): 19-38. (in Chinese)
[33] GRILICHES Z. Estimating the returns to schooling: Some econometric problems[J]. Econometrica, 1977, 45(1): 1-22.
[34] 全国人民代表大会常务委员会. 中华人民共和国专利法[EB/OL]. (2020-11-19)[2022-11-17]. http://www.npc.gov.cn/npc/c30834/202011/82354d98e70947c09dbc5e4eeb78bdf3.shtml. National People's Congress. Patent law of the People's Republic of China[EB/OL]. (2020-11-19)[2022-11-17]. http://www.npc.gov.cn/npc/c30834/202011/82354d98e70947c09dbc5e4eeb78bdf3.shtml. (in Chinese)
[35] TIAN X, WANG T Y. Tolerance for failure and corporate innovation[J]. The Review of Financial Studies, 2014, 27(1): 211-255.
[36] BHARATH S T, SHUMWAY T. Forecasting default with the Merton distance to default model[J]. The Review of Financial Studies, 2008, 21(3): 1339-1369.
[37] VASSALOU M, XING Y H. Default risk in equity returns[J]. The Journal of Finance, 2004, 59(2): 831-868.
[38] GENG Z, JUN P. The SOE premium and government support in China's credit market[R]. Cambridge: National Bureau of Economic Research, 2019.
[39] MERTON R C. On the pricing of corporate debt: The risk structure of interest rates[J]. The Journal of Finance, 1974, 29(2): 449-470.
[40] CROSBIE P, BOHN J. Modeling default risk[R]. San Francisco, USA: Moody's KMV, 2003.
[41] BARKER III V L, MUELLER G C. CEO characteristics and firm R&D spending[J]. Management Science, 2002, 48(6): 782-801.
[42] OHLSON J A. Financial ratios and the probabilistic prediction of bankruptcy[J]. Journal of Accounting Research, 1980, 18(1): 109-131.
[43] HALL B H, JAFFE A, TRAJTENBER M. Market value and patent citations[J]. The RAND Journal of Economics, 2005, 36(1): 16-38.
[44] HOBERG G, PHILLIPS G. Text-based network industries and endogenous product differentiation[J]. Journal of Political Economy, 2016, 124(5): 1423-1465.
[45] 樊纲, 王小鲁, 朱恒鹏. 中国市场化指数——各地区市场化相对进程2011年报告[M]. 北京: 经济科学出版社, 2011. FAN G, WANG X L, ZHU H P. China's marketization index—2011 report on the relative process of marketization by region[M]. Beijing: Economic Science Press, 2011. (in Chinese)
[46] 白重恩, 刘俏, 陆洲, 等. 中国上市公司治理结构的实证研究[J]. 经济研究, 2005, 40(2): 81-91. BAI C E, LIU Q, LU Z, et al. An empirical study on Chinese listed firms' corporate governance[J]. Economic Research Journal, 2005, 40(2): 81-91. (in Chinese)
[47] BARON R M, KENNY D A. The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations[J]. Journal of Personality and Social Psychology, 1986, 51(6): 1173-1182.
[48] 杨伽伦, 朱玉杰. 薪酬管制、企业内部薪酬差距与创新: 来自制造业的证据[J]. 经济学报, 2020, 7(4): 122-155. YANG J L, ZHU Y J. Compensation restriction, pay gap and innovation: Evidence from manufacturing industry[J]. China Journal of Economics, 2020, 7(4): 122-155. (in Chinese)
[49] LOW A. Managerial risk-taking behavior and equity-based compensation[J]. Journal of Financial Economics, 2009, 92(3): 470-490.
[50] 徐经长, 乔菲, 张东旭. 限薪令与企业创新: 一项准自然实验[J]. 管理科学, 2019, 32(2): 120-134. XU J C, QIAO F, ZHANG D X. Pay limit and corporate innovation: A quasi-natural experiment[J]. Journal of Management Science, 2019, 32(2): 120-134. (in Chinese)
[51] FAMA E F, FRENCH K R. Common risk factors in the returns on stocks and bonds[J]. Journal of Financial Economics, 1993, 33(1): 3-56.
[52] HOU K W, XUE C, ZHANG L. Digesting anomalies: An investment approach[J]. The Review of Financial Studies, 2015, 28(3): 650-705.
[53] 苏坤. 管理层股权激励、风险承担与资本配置效率[J]. 管理科学, 2015, 28(3): 14-25. SU K. Management equity incentive, risk taking and efficiency of capital allocation[J]. Journal of Management Science, 2015, 28(3): 14-25. (in Chinese)
[54] 罗党论, 应千伟, 常亮. 银行授信、产权与企业过度投资: 中国上市公司的经验证据[J]. 世界经济, 2012, 35(3): 48-67. LUO D L, YING Q W, CHANG L. Bank credit, property right and enterprise overinvestment: Empirical evidence of Chinese listed companies[J]. The Journal of World Economy, 2012, 35(3): 48-67. (in Chinese)