State Capitalism vs. Private Enterprise

54 Pages Posted: 17 Feb 2015

See all articles by Donghua Chen

Donghua Chen

Nanjing University

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Haitian Lu

Hong Kong Polytechnic University

Mingming Zhou

University of Colorado, Colorado Springs - College of Business

Multiple version iconThere are 4 versions of this paper

Date Written: February 2015

Abstract

We study the efficiency of internal capital markets at state-controlled and privately owned business groups in China. Using highly granular data on within-group capital flows, we document stark differences: while private groups allocate more capital to units with better investment opportunities, state groups do the opposite. Minority shareholders in state owned firms suffer as a result. Product market competition and external monitoring by outside investors help discipline state groups’ tendency to ignore investment opportunities. We conjecture that capital allocations at state groups reflect the private career objectives of their chairmen. We show that promotion depends not on increasing profitability but on avoiding layoffs. Consistent with a career motive, we find that capital allocations are used to prop up large and struggling employers, but only if the chairman has a realistic chance of being promoted and if the cost of self-interested behavior is not too high.

Keywords: business groups, internal capital markets, private enterprise, state capitalism

JEL Classification: G15, G31, G32, G34

Suggested Citation

Chen, Donghua and Ljungqvist, Alexander and Ljungqvist, Alexander and Lu, Haitian and Zhou, Mingming, State Capitalism vs. Private Enterprise (February 2015). CEPR Discussion Paper No. DP10423, Available at SSRN: https://ssrn.com/abstract=2566326

Donghua Chen (Contact Author)

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Haitian Lu

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom
Hong Kong

Mingming Zhou

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States
1-719-255-5153 (Phone)

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