Government intervention and investment efficiency: Evidence from China

By Shimin Chen, Zheng Sun, Song Tang, Donghui Wu. 2011

1,212 citations recorded by the source corpus.

The extant corporate investment literature has documented that information asymmetry and agency conflicts between managers and outside investors prevent firms from making optimal investment decisions. In this study, we investigate whether government intervention, as another form of friction, distorts firms' investment behavior and leads to investment inefficiency. Using Chinese data, we test this by measuring government intervention at two different levels. First, we compare investment efficiency between SOEs and non-SOEs. We find that the sensitivity of investment expenditure to investment opportunities is significantly weaker for SOEs. Second, we measure government intervention by whether a firm is politically connected through the employment of top executives with a government background. We find that political connections significantly reduce investment efficiency in SOEs. However, we do not find such evidence in non-SOEs. Taken together, our findings suggest that government intervention in SOEs through majority state ownership or the appointment of connected managers distorts investment behavior and harms investment efficiency.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/497a28efc0f58140ddf5d43fbdd5f78cbb5851ff

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Citations in the corpus

Can China’s Energy Intensity Constraint Policy Promote Total Factor Energy Efficiency? Evidence from the Industrial Sector (2019, background): “Therefore, the low efficiency of capital input in the production process leads to a decline in the TFEEG (Chen et al., 2011).”
GDP management to meet or beat growth targets (2018, background): “More importantly, local governments have direct control of public consumption expenditures (Chen et al., 2013; Chen et al., 2011).”
Institutional Investors, Political Connections, and the Incidence of Regulatory Enforcement Against Corporate Fraud (2014, background): “Another related paper is by Chen et al. (2011), who investigate and compare the effects of political connections on the investment efficiency of SOEs and nonSOEs, whereas we focus on how political connections affect the incidence of enforcement against fraud.”