Equity Diversification and Capital Allocation Efficiency: Evidence from China’s Mixed Ownership Reform

Abstract

AbstractThis study investigates the impact of equity diversification on the efficiency of corporate capital allocation. Using A-share listed Chinese state-owned companies in 2009–2016, we empirically test the relationship between equity diversification and capital allocation efficiency and find that introducing non-state capital into state-owned enterprises can significantly improve the efficiency of state-owned enterprises’ capital allocation. We use China’s “mixed ownership reform” to construct a DID model to overcome the endogenous problem. Further tests show that the higher the participation of non-state shareholders, the more efficient the capital allocation of state-owned enterprises. Our results provide evidence for China’s State-owned enterprise reform. KeywordsEquity diversificationCapital allocation efficiencyMixed ownership reform