Abstract
We study the effect of state control on capital allocation and investment in China where the government screens prospective stock issuers. We find that state firms are more likely to obtain government approval to conduct seasoned equity offerings than non-state firms. Further, non-state firms exhibit greater sensitivities of subsequent investment and stock performance to regulatory decisions on stock issuances than state firms. Our work suggests that state control of capital access distorts resource allocation and impedes the growth of non-state firms. We also provide robust evidence that financial constraints cause underinvestment.
Highlights
The global financial and economic crisis between 2007 and 2010 triggered a fresh debate about the role of the government in the economy and highlighted the importance of understanding how financing frictions affect firm investment and the economy (Kashyap and Zingales, 2010; Duchin et al, 2010; Campello et al, 2010)
We focus on firms announcing seasoned equity offering (SEO) proposals before 2004 to avoid the confounding impact of this regulation
The sensitivities of subsequent investment and stock performance to regulatory decisions on the seasoned equity offering screening process are more pronounced for non-state firms than for state firms
Summary
The global financial and economic crisis between 2007 and 2010 triggered a fresh debate about the role of the government in the economy and highlighted the importance of understanding how financing frictions affect firm investment and the economy (Kashyap and Zingales, 2010; Duchin et al, 2010; Campello et al, 2010). We examine whether during the regulatory screening process of seasoned equity offering (SEO) applications, non-state-controlled and state-controlled firms are treated differently, and how their subsequent investment and stock performance are affected differently by regulatory decisions. The long-run stock performance of state firms is barely affected by regulatory decisions and is not different from that of non-SEO firms. Our work provides new and direct evidence that assists researchers and regulators in gaining a better understanding of how political forces affect access to finance and capital allocation efficiency. China has two types of firms, controlled by the state and the private sector (non-state entrepreneurs) respectively, which have differing degrees of financial constraints Comparing the responses of non-state and state firms to regulatory decisions generates robust evidence about the impact of financial constraints on investment.
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