Working Paper: NBER ID: w20930
Authors: Alexander Ljungqvist; Donghua Chen; Dequan Jiang; Haitian Lu; Mingming Zhou
Abstract: We study the efficiency of capital allocations at state-controlled and privately owned business groups in China. Using highly granular data on within-group capital transfers, we document stark differences: while private groups allocate more capital to units with better investment opportunities, state groups do the opposite, especially when part of the “national team.” Minority shareholders in state owned enterprises suffer as a result. External monitoring by outside investors helps discipline state groups’ tendency to ignore investment opportunities. We trace capital allocation decisions to the objectives of the Chinese Communist Party, which incentivizes managers to maintain social stability. Consistent with the party’s policy preferences, capital allocations are used to prop up struggling employers in high-unemployment areas and when many young men enter the local labor market, but the interests of the party and of managers may be misaligned.
Keywords: State Capitalism; Private Enterprise; Capital Allocation; China; Investment Opportunities
JEL Codes: G15; G31; G32; G34; P1; P31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Private business groups (L39) | More efficient capital allocation (D61) |
| Tobin's Q (G19) | Net capital allocation (private groups) (G31) |
| Net capital allocation (state groups) (H70) | Tobin's Q (G19) |
| Political objectives of CCP (E61) | Capital allocation decisions (state groups) (H70) |
| External monitoring by minority shareholders (G34) | Capital allocation efficiency (state firms) (D61) |
| Capital allocation decisions (state groups) (H70) | Job losses (J63) |
| Capital allocation from high-Q firms (D25) | Struggling firms (state groups) (L10) |
| Minority shareholders (G34) | Negative returns (G12) |