Corporate Pyramids, Geographical Distance, and Investment Efficiency of Chinese State-Owned Enterprises

75 Pages Posted: 22 Feb 2018 Last revised: 25 Oct 2018

See all articles by Wei Opie

Wei Opie

Deakin University - Deakin Business School

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Hong Feng Zhang

Deakin University - Deakin Business School

Date Written: October 15, 2018

Abstract

We investigate how the state’s intervention in the investment decisions of Chinese local SOEs is affected by corporate control distance in the form of pyramidal layers and the geographical distance between the SOEs and their government controllers. Although both the corporate control distance and the geographical distance affect the state’s costs of acquiring information about the SOEs, the former is created intentionally by the state to delegate decision rights, and the latter is largely exogenous. We find that local SOEs’ investment efficiency is positively associated with the extensiveness of pyramids but negatively related to the geographical distance. The positive impact of pyramid-building on investment efficiency remains strong even when information costs captured by the geographical distance are low. However, the two distance measures lose their impact on investment efficiency when local governments reclaim control through a vertical interlock of chairman. Our results indicate that the credibility of the government’s intention to delegate decision rights is vital to the SOEs’ efficiency when government intervention is the norm in China.

Keywords: Government intervention, state-owned enterprises, pyramidal layer, geographical distance, vertical interlock

JEL Classification: D22, G30, G32, G38

Suggested Citation

Opie, Wei and Tian, Gary Gang and Zhang, Hong Feng, Corporate Pyramids, Geographical Distance, and Investment Efficiency of Chinese State-Owned Enterprises (October 15, 2018). Available at SSRN: https://ssrn.com/abstract=3122712 or http://dx.doi.org/10.2139/ssrn.3122712

Wei Opie

Deakin University - Deakin Business School ( email )

221 Burwood Highway
Burwood
Melbourne, Victoria 3125
Australia

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Hong Feng Zhang

Deakin University - Deakin Business School ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

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