Can Chinese State Owned Enterprises Fulfill Both Social and Corporate Objectives?

Abstract

In China, state governance in corporations serves the purpose of Party control over the political, social, and economic development and most importantly, stability of the country. Therefore, they have equally important corporate and social objectives. Both objectives must be controlled and managed well through the corporate sector in order for China to successfully advance its economy and preserve its political order. While the state governance relationship with performance of Chinese corporations is well studied, the state relationship with employment is not studied at all. Therefore, we propose that state governance will have effects on performance and employment. Moreover, if Chinese firms have dual objectives, then it raises the interesting question if they can do so efficiently. Hence, we examine efficiency as a third objective of state governance. This study examines these relationships by panel regressions for a large and recent sample of 27,896 Chinese publicly listed firms during 2001-2011.We affirm these objectives with our empirical results which show that state ownership determines both financial and employment performance in Chinese firms. The results affirm a non-linear, convex relationship between state ownership and financial performance as measured by Tobin’s Q and stock returns. This relationship suggests private governed and highly state governed firms have lower performance than mixed governed firms. Second, results strongly indicate that state governance positively affects the amount of employment (in spite of firm size) and job stability. Although state governed firms are achieving high employment and stability performance, they are worse in creating new employment versus privately controlled firms. These results support our hypothesis of the employment objective of Chinese firms. Thirdly, results indicate that efficiency has a non-linear concave relationship with state ownership. This relationship offers an explanation that is consistent of a tradeoff between these dual financial and social objectives-performance relationship of Chinese firms. Overall, we conclude that state governance does indeed determine both corporate and social objectives in Chinese firms.