Central State-owned Enterprises Research Articles

Foreign Divestment and High-Quality Development of State-Owned Enterprises

In China, state-owned enterprises (SOEs) are a crucial pillar and leading force in the national economy, with their high-quality development having a significant impact on the country's economic progress. In recent years, the pace of foreign investment entering China has notably slowed, and the relocation of foreign enterprises from certain industries has increased, making foreign divestment a reality that cannot be ignored. This paper selects data from Chinese A-share listed state-owned companies from 2013 to 2022 as the initial research sample to empirically analyze the impact of foreign divestment on the high-quality development of SOEs. The study finds that: (1) Foreign divestment significantly inhibits the high-quality development of SOEs. (2) Foreign divestment can suppress the high-quality development of SOEs by exacerbating financing constraints, reducing innovation output, and diminishing corporate competitiveness. (3) Implementing a differentiated strategy intensifies the inhibitory effect of foreign divestment on the high-quality development of SOEs, whereas mixed-ownership reform and the digital economy can mitigate this impact. Additionally, the heterogeneity test in this paper reveals that the inhibitory effect of foreign divestment on the high-quality development of local SOEs is stronger than that on central SOEs. Regionally, the inhibitory effect is most pronounced in the eastern regions. This paper enriches the research on foreign divestment and high-quality development of SOEs, exploring the heterogeneous impacts on central and local SOEs and SOEs in different regions, which aids in formulating targeted policy measures to enhance the risk resistance of SOEs and promote their high-quality development.

Overcoming one-sidedness in cadre personnel management: Developing a competency framework for China's central state-owned enterprise executives

China's central state-owned enterprises (SOEs) are politically and economically significant, and executives play a crucial role in determining their performance. In a competitive business environment, the selection and competencies of central SOE executives are crucial. This study aims to identify the competencies required to operate central SOEs and develops a competency framework for their executives. Through qualitative studies (face-to-face interviews and Delphi method) and two quantitative studies, we identify four dimensions—self-development, interpersonal, positional and organizational development—comprising 12 factors and 45 competencies, and use these to construct a competency framework. The competencies identified include some previously identified, but also unique competencies that are specific to the Chinese context. The proposed framework is valuable for understanding and improving managerial practices in central SOEs, and will help in the selection and development of executives. It also provides insights for central SOEs, and for individuals considering career and competency development.

State Ownership Heterogeneity and Corporate Innovation: New Evidence from a Hierarchical Perspective

Unlike prior research, this study re-examines the relationship between state ownership and corporate innovation from a hierarchical perspective. Drawing upon institutional theory, our findings reveal the heterogeneous impact of state ownership, elucidating the positive role of central state ownership in fostering corporate innovation, while highlighting the inhibitory effect of local state ownership. This conclusion withstands rigorous scrutiny through a battery of robustness checks. Mechanism analysis indicates that central state-owned enterprises stimulate innovation by increasing innovation investment and enhancing efficiency, whereas local state-owned enterprises create obstacles for both innovation investment and efficiency. Our paper offers a hierarchical interpretation of the mixed evidence regarding the relationship between state ownership and corporate innovation. Whether state ownership serves as a facilitator or a hindrance to innovation depends on whether central or local state-owned enterprises dominate the national innovation process. Overall, this study offers new insights into the complex effects of state ownership heterogeneity on corporate innovation activities in emerging economies like China, advancing our understanding of the subtle relationship between corporate governance and innovation.

Assessing the asymmetric cost behavior in China

PurposeA country’s institutional environment influences every facet of its business. This paper aims to identify institutional factors (state ownership, government attention on employment and employees’ educational background) that affect the asymmetric cost behavior in China.Design/methodology/approachUsing 2,570 listed firms’ data between 2002 and 2015, we use empirical models to explore the effects of state ownership, government attention on employment and employees’ educational background on the asymmetric cost behavior in China.FindingsThis study found that the asymmetric cost behavior of central state-owned enterprises (CSOEs) is greater than local state-owned enterprises (LSOEs). Meanwhile, the empirical results show that government attention on employment is reflected in five-year government plans, and employees’ educational backgrounds are positively associated with asymmetric cost behavior.Originality/valueThis study contributes to the economic theory of sticky costs, institutional theory and asymmetric cost behavior literature by providing evidence that shows how government intervention and employee educational background limit the flexibility of corporate cost adjustments. Additionally, this study provides guidance to policymakers by showing how government long-term plans affect firm-level resource adjustment decisions.

Career Mobility and Performance Evaluation of China's SOE Managerial Elites

Abstract This paper examines the career mobility and performance evaluation of the leaders of China's state-owned enterprises (SOEs) at the central, provincial and prefectural levels. Using data on executive turnover within publicly listed SOEs, we find that central and local SOE leaders have a similar career flow pattern. Specifically, vertical mobility within the same business group is common and more than 60 per cent of SOE leaders leave their office within three years. Only a minority of SOE leaders achieve political promotion. We also find that performance evaluation criteria are different across central and local SOEs. The leaders who provide better economic outcomes for central SOEs obtain a higher evaluation score, while close political connections boost the promotion prospects of local SOE leaders. Overall, our findings provide granular evidence on the personnel management of China's SOEs from a comparative perspective.

The effect of digitalized tax administration on stock price crash risk: A natural experiment in China

Using a digitalization event of tax governance (the Golden Tax Project III (GTP III)) as a natural experiment, this paper exploits the staggered DID method to investigate the impact of digitalized tax administration on firm-specific future stock price crash risk (SPCR) in China. Our results reveal that the GTP III appears to reduce SPCR. Our findings highlight that the digitalized tax administration has a more prominent association with SPCR for local state-owned enterprises (compared to central state-owned enterprises) and privately controlled enterprises with political connections (compared to privately controlled enterprises without political connections). We also find that the mitigation effect of digitalized tax administration on SPCR is only significant in regions with relatively developed digital economies, for firms managed by senior executives without any financial backgrounds, and firms that receive less media attention. Further investigation reveals that the digitalized tax administration helps to reduce SPCR through the mechanism of tax avoidance, rent-seeking and information transparency.

Do all CEO pay regulations hurt firm performance? Evidence from China

PurposeThe authors study and compare the effects of three CEO compensation restricting policies issued by the Chinese government in 2009, 2012 and 2015. This paper aims to shed light on the conditions under which CEO compenstation can be effectively regulated without negatively affecting firm performance. Design/methodology/approachThese policies targeted state-owned enterprises (SOEs), especially central state-owned enterprises (CSOEs). Using these policies as natural experiments, the authors investigate how their effects differ on CEO compensation, firm performance and two known performance-decreasing mechanisms: perk consumption and tunneling activities.FindingsThe authors show that restricting CEO pay does not necessarily backfire in terms of deteriorating firm performance. This non-decreasing firm performance can be achieved by restricting perk consumption and tunneling activities while introducing CEO pay regulations.Originality/valueThe authors exploit a powerful experimental setting in the context of China. The evidence contributes to the literature on CEO pay regulations and is relevant to the managerial decisions of policy makers and boards of directors.

Nexus between government surveillance on executive compensation and green innovation: Evidence from the type of state‐owned enterprises

AbstractThe Chinese government capped executive compensation in state‐owned enterprises (SOEs) to address income inequality and promote a more equitable distribution of wealth. This study investigates whether regulating top executives' pay alters their motivation for corporate green innovation (GI) initiatives. Using data from 2006 to 2018 for Chinese‐listed SOEs, the regression analysis and difference‐in‐difference methods revealed that government restrictions on executive compensation negatively affect GI. Furthermore, the types of SOE results show that the negative effect of pay restrictions on GI exists only in local SOEs, as opposed to central SOEs. Moreover, high managerial shareholding positively moderates this negative effect, demonstrating that the adverse effects of compensation restrictions are mitigated by the convergence of interests between managers and stakeholders. These findings are robust to instrumental variables and other robustness tests. This study provides policy recommendations for the government to boost its assistance in GI and establish new environment‐related incentives that motivate managers to promote GI and inspire enterprises to deploy sustainable environmental initiatives.

Parent company board reform and subsidiary optimization of cash holdings: A quasi-natural experiment from central state-owned enterprises in China

This study finds that board reform of parent companies in central state-owned enterprise (SOE) groups in China has significantly optimized the cash holdings of subsidiaries, which is reflected in reducing the level of cash redundancy and cash shortage. Moreover, the optimization function manifests mainly in moderate pyramid hierarchy samples, longer geographic distance samples, and fewer vertical interlocks of executive samples between the parent company and subsidiaries. In addition, we examine whether the mechanism for optimizing cash holdings alleviates agency problems, reduces government intervention, and promotes power delegation. Board reform also improves corporate value by optimizing cash holdings. We argue that board reform of parent companies in SOE groups helps alleviate problems caused by the absence of owners, and it reconstructs the power relationship between the government and SOEs. It also facilitates SOEs making reasonable and market-oriented cash holding decisions.

Do board reforms in parent firms boost subsidiaries’ innovation?

Although corporate boards play an important role in innovation from a static perspective, little attention has been paid to the impact of board reforms in parent firms on subsidiaries' innovation from a dynamic perspective. Using a quasi-natural experiment on board reforms in central state-owned enterprises (CSOEs) in China, we establish the causal effect of board reforms in parent firms on subsidiaries' innovation. We find that the board reforms in parent firms significantly improve subsidiaries' innovation, which is more significant in enterprises with a higher degree of myopia, lower tolerance of failure, and stronger competitiveness. We also find that an increase in financing constraints and deteriorating corporate governance can positively moderate the policy effect of board reforms in CSOEs on subsidiaries’ innovation. Finally, we provide evidence that board reforms in parent firms enhance the value of subsidiaries.

Ultimate Control Rights, Nationalization and Firm Performance: Evidence from China

ABSTRACT This study extends the empirical literature on nationalization by examining the determinants and consequences of state takeovers among China listed firms in which ultimate control has been transferred from private owners to the government. This study finds that state takeovers are more likely in firms with poor performance and higher leverage. Moreover, privatization of central state-owned enterprises is most likely to be reversed. Contrary to popular belief about government interventions, state takeovers lead to higher profitability and labor productivity. These results suggest that government takeovers could address market failures and enhances firms’ performance in emerging markets.

Assessing the roles of efficient market versus regulatory capture in China’s power market reform

China began implementing market-based economic dispatch through power sector reform in 2015, but the reform has encountered some political and economic challenges. Here we identify the reform’s efficiency changes and explore the influences of market-driven and politically driven mechanisms behind them. We do this through a cost-minimizing dispatch model integrating high-frequency data in southern China. We find that the dispatch transition improves the overall efficiency, but regulatory capture in provincial markets limits its full potential. The preference for local enterprises over central state-owned enterprises (SOEs) by local governments, in the form of allocated generation quotas, demonstrates the political challenge for market reform. The allocated generation quota protects small coal-fired and natural gas generators owned by local SOEs, lessening their motivation to improve generation efficiency, even after the reform. As a result, nearly half of the potential carbon dioxide emissions reduction and social welfare gains through market reform is not realized.

Judicial independence and corporate innovation: Evidence from the establishment of circuit courts

This study explores the effects of judicial independence on corporate innovation by analyzing the staggered establishment of Circuit Courts in China. We find that introducing Circuit Courts increases corporate innovation, particularly for central state-owned enterprises and private firms. Channel analysis shows that Circuit Courts significantly reduce local judicial protectionism, ease financial constraints, and improve corporate governance, which stimulates innovation. The positive effects of Circuit Courts are more pronounced in cities facing severe political intervention, regions with weak legal environments, and private firms without political or banking connections. Our results are robust to endogeneity concerns, alternative measures and specification models. Overall, this study supports the theoretical arguments that institutions matter and that improvements in judicial quality boost firms' incentives to innovate.

Corporate governance of the parent company and executive compensation contracts in subsidiary firms: Evidence from China

ABSTRACT This paper studies whether the corporate governance of the parent company affects the executive compensation contract of its listed subsidiaries. Based on a quasi-natural experiment on the board reforms in the Chinese central state-owned enterprises (CSOEs), which improves the corporate governance in the ultimate parent company, we find the following: (1) The improved corporate governance of the parent company can effectively restrain the managerial power of listed subsidiaries and reduce excess managerial pay. (2) The above-documented effect is more pronounced when cash flow rights (the wedge between control rights and cash flow rights) of the ultimate parent company is low (high), or when the listed company is at the bottom of the pyramid, or when the managerial power of the subsidiary firm is higher. (3) The improved corporate governance of the parent company can also effectively alleviate managerial perk consumption and the executive–employee compensation gap at their listed subsidiaries. This study suggests that the governance improvement in ultimate parents has a spillover effect in that it enhances the governance at their listed subsidiaries.

Are State-Owned Enterprises Equally Reliable Information Suppliers? An Examination of the Impacts of State Ownership on Earnings Management Strategies of Chinese Enterprises

Earnings management refers to a company’s use of either accounting techniques (accrual-based earnings management) or real economic activities (real earnings management) to manipulate reported earnings and mislead users of financial information. It often indicates serious ethical issues in a company’s management, which will affect the reliability and sustainability of a firm’s services in the supply chain. Using A-share listed Chinese firms on the Shanghai and Shenzhen Stock Exchanges, we investigated the impacts of state ownership on management’s decision to select real or accrual-based earnings management strategies. We found that state-owned enterprises (SOEs) tend to favor real earnings management over accrual-based earnings management more than non-SOEs. Furthermore, those SOEs that are controlled by the central government engage in real earnings management more often than those controlled by local governments. We also examined whether media attention and litigation interact with state ownership to affect earnings management. We found that SOEs, especially central SOEs, with a high level of media attention or an incidence of litigation, are more likely to use real earnings management. Our research can assist firms in making better decisions in selecting business partners and service suppliers in an emerging market through the assessment of management integrity.

Are State-Owned Enterprises Really Ineffective? An Empirical Study Based on Stochastic Frontier Analysis

Technical efficiency (TE) and total factor productivity (TFP) are important criteria to ensure the enhancement of the quality and efficiency of state-owned enterprises (SOEs) and function as important indicators to assess the quality of their accomplishments. The purpose of this study is to explore whether the efficiency of SOEs is higher or lower than that of private enterprises. Transcendental logarithmic production function and stochastic frontier analysis (SFA) are used to assess the TE and TFP of listed central SOEs, local SOEs, and private enterprises, the data of which were taken from 2006–2020. The results show that the sampled private enterprises had the highest average TE during the study period, followed by the central and local SOEs. The private enterprises also had the highest average TFP growth rate, followed by the local and central SOEs. The TFP decompositions show that the TE change (TEC) and technical change (TC) indices of the SOEs were lower than those of the private enterprises. The TC, TEC, and scale change (SC) are limiting the TFP growth rates of the SOEs in labor-intensive industries. The SC of the SOEs has changed less than that of private enterprises in the sampled capital-intensive industries. Northern and southern China had the highest rates of TE and TFP growth. Indeed, this paper measures and decomposes TFP, and analyzes the efficiency of SOEs and private enterprises in different industries and regions in an international context.

When does a female leadership advantage exist? Evidence from SOEs in China

AbstractResearch Question/IssueWe approach the ongoing debate in the literature on when and why a female leadership advantage exists in the context of China. In particular, we examine whether female CEOs outperform male CEOs in state‐owned enterprises (SOEs).Research Findings/InsightsWe show that a female leadership advantage exists in SOEs. We find that the female leadership increased performance is attributed to improved profitability, capital structure, and operating efficiency. The magnitude of this gender effect is bigger in central state‐owned enterprises (CSOEs) than that in local state‐owned enterprises (LSOEs). The results are robust to additional tests that mitigate the sample selection and other endogeneity concerns.Theoretical/Academic ImplicationsWe use the role congruity theory to motivate and develop the hypotheses drawing insights upon the literature in psychology and leadership. Female CEOs are perceived as less congruent with their leadership roles given the gender role stereotypes. Thus, they face more challenges and difficulties than male CEOs. These obstacles take at least two forms which are significant in SOEs: shareholder activism and sex discrimination. Female CEOs have to outperform their male counterparts to alleviate the pressure from shareholder activism and showcase their managerial skills and abilities.Practitioner/Policy ImplicationsFor the state shareholders, the extra scrutiny in selecting female CEOs should be lifted given this outperformance. The evidence is also relevant for CEOs to choose their career paths among different types of firms, for boards of directors on their strategic decisions on CEO hiring, and for policy makers to promote the female leadership advantage.

ESG performance, capital financing decisions, and audit quality: empirical evidence from Chinese state-owned enterprises.

We study the nexus between environmental, social, and governance (ESG) performance and corporate capital financing decisions. Further, we also analyze the effect of audit quality and type of ownership (state-owned enterprises (SOEs) vs non-state-owned enterprises (non-SOEs), local vs central SOEs in this relationship. By applying panel regression (fixed effects) on 6295 firm-year observations of Chinese A-listed enterprises data for 2010-2019, we conclude that firms' ESG information is crucial to their financing decisions. In particular, firms with superior ESG performance have lower debt financing. The findings suggest that enterprises with strong ESG performance have easy access to equity funding via stock markets. Further, this relationship is more pronounced in SOE compared to non-SOEs and in central SOEs compared to local SOEs. These results demonstrate that the market may promote desired social outcomes by rewarding ESG performance; however, we find no significant effect of audit quality in this relationship. Findings are robust to different sensitivity tests, including an alternative estimation, sysGMM regression to address endogeneity issues, and lagged regressions to address reverse causality.

Has the Restructuring of Chinese Central Stated-Owned Enterprises Achieved the Goal of International Expansion?

Using the difference-in-differences method, we examine the internationalization effects of the restructuring of Chinese Central State-owned Enterprises (CCSOEs) during the years 2003 and 2016. We find that restructured CCSOEs have not achieved a higher degree of internationalization. Indeed, the higher the degree of internationalization after the CCSOE restructuring, the worse the firm’s performance. Overall, the results suggest that the Chinese government’s attempt to promote CCSOE internationalization through restructuring has not achieved its goal. Rather than governmental support and intervention, accelerating market-oriented reforms, weakening or eliminating administrative monopolies in the domestic market, and reducing the monopoly profits of CCSOEs in the domestic market could be more effective approaches to promote CCSOE internationalization.

Mandatory dividend policy and investment efficiency within state-owned business groups

This research explores capital allocation efficiency in business groups when parent firms experience adverse shocks in their cash flow. Using the quasi-experimental method, this study finds that: (1) When parent central state-owned enterprises (parent CSOEs) are required to pay dividends to the government, their group-affiliated listed central state-owned enterprises (listed CSOEs) substantially improve investment efficiency. (2) A plausible mechanism is that the adverse cash shocks of parent CSOEs could facilitate the resource reallocation through related party transactions within a business group motivated by the listed CSOEs' investment opportunity instead of the parent CSOEs' tunneling behavior. (3) Our findings are more pronounced for firms with more serious agency problems. Overall, we provide the empirical evaluation of the economic consequences of mandatory dividend policy in terms of a firm's investment efficiency within a state-owned business group.