The fault-tolerant and error-correction mechanism and capital allocation efficiency of state-owned Enterprises in China

Abstract

This study investigates the effect of a fault-tolerant and error-correction mechanism (FTECM) on state-owned enterprises' (SOEs') capital-allocation efficiency (CAE). We conduct difference-in-differences estimations and find that the implementation of this policy significantly improves SOEs' CAE, which remains robust to a series of tests. A mechanism analysis shows that the FTECM can increase executives' willingness to take risks and improve internal governance. A heterogeneity analysis shows that our results are more pronounced in SOEs whose executives have lower risk preferences, weaker internal governance, and less external supervision. We also find that the FTECM improves SOEs' performance. Overall, this study enriches the research on the driving factors in SOEs' CAE and provides a micro-level evaluation of the economic consequences of the FTECM.