Using one of the largest samples of litigation data available to date, we examine whether the political culture of a firm determines its propensity for corporate misconduct. We measure political culture using the politi- cal contributions of top managers, firm political action committees, and local residents. We show that firms with a Republican culture are more likely to be the subject of civil rights, labor, and environmental litigation than are Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and envi- ronmental protection. However, firms with a Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than are Republican firms, whose party ideology stresses self-reliance, property rights, market discipline, and limited government regulation. Upon lit- igation filing, both types of firms experience similar announcement reaction, which suggests that the observed relationship between political culture and corporate misconduct is unlikely to reflect differences in expected litigation costs.

Financing of and investing in R&D are prone to risks of appropriation by competitors, information asymmetry, and agency problems. Although legal protection of intellectual property (IP) rights at the national level is necessary to encourage investing in R&D, we show that the effective enforcement at the local level is critical. We focus on the impact of provincial level IP rights enforcement on the financing of and investing in R&D, using a unique and rich database of high technology firms. These firms are located in twenty-eight provinces/districts throughout China. The enforcement of IP rights differs at the provincial level, although the firms are under the same set of national and international laws. To identify the causal effect of provincial level IP rights enforcement on firm behavior, we use several approaches to deal with the issues of endogeneity, reverse causality, and simultaneity. Controlling for provincial institutional factors such as economic development, banking system development, legal system performance, and local government corruption, we find that the enforcement of IP rights positively affects firms’ ability to acquire new external debt (including formal and informal financing) and external equity. Firms in provinces with better enforcement of IP rights invest more funding in R&D, generate more innovation patents, and produce more sales from new products. We also find better enforcement of IP rights encourages financing of and investment in R&D in foreign and ethnic joint ventures. The results confirm that enforcement of IP rights matters even in China. Our paper provides firm level evidence that financing of and investing in R&D are the channels that link enforcement of IP rights and economic growth.

Financing of and investing in R&D are prone to risks of appropriation by competitors, information asymmetry, and agency problems. Although legal protection of intellectual property (IP) rights at the national level is necessary to encourage investing in R&D, we show that the effective enforcement at the local level is also critical. We concentrate on the impact of IP rights enforcement at the provincial level on the financing of and investing in R&D, using a unique and rich sample of high technology firms. These firms are located in twenty-eight provinces/districts throughout China. The enforcement of IP rights differs at the provincial level, although the firms are under the same set of national and international laws. Controlling for provincial institutional factors such as economic development, banking system development, legal system performance, and local government corruption, we find that the enforcement of IP rights positively affects firms’ ability to acquire new external debt (including formal and informal financing) and external equity. The firms in provinces with better enforcement of IP rights invest more in R&D, generate more patents, and produce more sales from new products. We also find better enforcement of IP rights helps mitigate the problem of appropriation by local partners in foreign and ethnic joint ventures. Our evidence confirms that enforcement of IP rights matters even in China. Furthermore, our results support that the enforcement of IP rights affects the growth in the economy via the channels of financing of and investing in R&D.

Financing of and investing in R&D are prone to risks of appropriation by competitors, information asymmetry, and agency problems. Although legal protection of intellectual property (IP) rights at the national level is necessary to encourage investing in R&D, we show that the effective enforcement at the local level is also critical. We concentrate on the impact of provincial level IP rights enforcement on the financing of and investing in R&D, using a unique and rich sample of high technology firms. These firms are located in twenty-eight provinces/districts throughout China. The enforcement of IP rights differs at the provincial level, although the firms are under the same set of national and international laws. Controlling for provincial institutional factors such as economic development, banking system development, legal system performance, and local government corruption, we find that the enforcement of IP rights positively affects firms' ability to acquire new external debt (including formal and informal financing) and external equity. The firms in provinces with better enforcement of IP rights invest more funding in R&D, generate more patents, and produce more sales from new products. We also find better enforcement of IP rights helps mitigate the problem of appropriation by local partners in foreign and ethnic joint ventures. To deal with the problems of reverse causality and omitted common variables, we adopt the instrumental variable method and the approach used by Rajan and Zingales (1998), and the impact of IP rights enforcement is robust to different specifications. Our evidence confirms that enforcement of IP rights matters even in China. Furthermore, our results support that the enforcement of IP rights affects the growth in the economy via the channels of financing of and investing in R&D.