Recent studies in the law and finance literature have shown that property rights protection is central to corporate financing and investment decisions and economic growth at large. We extend this literature by examining the effect of property rights security on corporate risk management decisions — an important element of a firm's business strategy. Using a unique dataset covering over 55,000 Chinese firms and employing both institution- and firm-level measures of property rights security, we find that secure property rights lead to higher corporate demand for property insurance, suggesting that property rights security is an important determinant of corporate risk management decisions. The effect of property rights protection on insurance consumption is also validated by a cross-country analysis that uses data from 93 countries over the period 1995–2008. Our study sheds light on the importance of property rights protection to corporate risk management decisions.

Despite a longstanding debate over the pros and cons of imposing legal liability on directors and officers (D&Os), there is limited evidence on how D&O liability affects corporate innovation. We study this question by exploiting Nevada's 2001 corporate law change that dramatically lowered D&O legal liability and helped Nevada become the second most popular state for out-of-state incorporations. We find that firms incorporated in Nevada exhibit an increase in innovation outputs relative to matched control firms after the law change, particularly firms facing higher litigation risk or operating in more innovative industries. The results are driven mainly by exchange-listed firms that are subject to better governance than over-the-counter (OTC) listed firms. Lower D&O liability also enables firms to pursue more risky, but potentially more rewarding, explorative innovation. Therefore, although holding D&Os liable may be desirable overall, it also entails a cost by discouraging innovation in some firms. Our study has implications for how the litigation environment may influence sustainable growth via innovation.

We use China as a laboratory to test the effect of government quality on cash holdings. We build on, and extend, the existing literature on government expropriation and its interaction with firm-level agency problems by proposing a financial constraint mitigation argument. We find that firms hold less cash when local government quality is high, which is not consistent with the state expropriation argument, but supports the financial constraint mitigation argument. A good government lowers the investment sensitivity to cash flows and cash sensitivity to cash flows, decreases cash holdings more significantly in private firms, and improves access to bank and trade credit financing. We also test and find support for Stulz's (2005) model on the interaction between government and firm agency problems.