The Long Hand of State: The Structure of State-Led Business Groups and Performance Implications

Abstract

In this study we trace the identity of major shareholders of China’s listed firms and group them into business groups led by state asset management agencies at various levels. We argue that the objectives and motivations of the controlling state entities, the governance structure, and composition of the groups have strong influence on member firms’ financial performance. Using 2004-2012 panel data on firms listed on Shanghai and Shenzhen stock exchange, we find that controlling state agencies’ political status is positively associated with firms’ market value as measured by Tobin’s Q, but negatively associated with firms’ profitability as measured by ROA. Firms’ performance will be weaker in groups with more internal hierarchies. Moreover, we find that the group diversification is negatively associated with firms’ performance and this effect is stronger in places with more advanced market supporting institutions. In addition, the presence of non-state members in a group is beneficial to the financial performance of both state and non-state members.