What Gets Measured Gets Managed: Investment and the Cost of Capital

76 Pages Posted: 21 Feb 2022 Last revised: 11 May 2022

See all articles by Zhiguo He

Zhiguo He

University of Chicago - Finance

Guanmin Liao

Renmin University of China - School of Business

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: February 2022

Abstract

We study the impact of government-led incentive systems by examining a staggered reform in the Chinese state-owned enterprise (SOE) performance evaluation policy. To improve capital allocative efficiency, in 2010, regulators switched from using return on equity (ROE) to economic value added (EVA) when evaluating SOE performance. This EVA policy adopts a one-size-fits-all approach by stipulating a fixed cost of capital for virtually all SOEs, ignoring the potential heterogeneity of firm-specific costs of capital. We show that SOEs did respond to the performance evaluation reform by altering their investment decisions, more so when the actual borrowing rate was further away from the stipulated cost of capital. Our paper provides causal evidence that incentive schemes affect real investment and sheds new light on challenges faced by economic reforms in China.

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Suggested Citation

He, Zhiguo and Liao, Guanmin and Wang, Baolian, What Gets Measured Gets Managed: Investment and the Cost of Capital (February 2022). NBER Working Paper No. w29775, Available at SSRN: https://ssrn.com/abstract=4039494

Zhiguo He (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

Guanmin Liao

Renmin University of China - School of Business ( email )

No. 59 Zhongguancun Street, Haidian District
Beijing, Beijing 100872
China

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate ( email )

314 Stuzin Hall
Gainesville, FL 32611
United States

HOME PAGE: http://www.wangbaolian.com

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