The Unintended Consequence of Discipline Inspections as an Anti-Corruption Tool on Managerial Incentives

48 Pages Posted: 19 Aug 2023 Last revised: 6 Feb 2024

See all articles by William L. Megginson

William L. Megginson

University of Oklahoma

Kedi Wang

Beijing Institute of Technology

Junjie Xia

Central University of Finance and Economics; Peking University

Date Written: August 18, 2023

Abstract

China’s central government has since 2013 subjected state-owned enterprises (SOEs) to ‘disciplinary inspections’ to weed out graft and punish corruption. While this policy has been somewhat successful—over 160 top SOE officials have been indicted—the principal economic impact of these inspections has been to significantly cut investment by targeted firms, causing a major decline in profitability, innovation and Tobin’s Q. R&D, entertainment, and travel spending also decline dramatically. The likeliest explanation is that the fear induced in SOE managers, who have limited risk-promoting equity holdings and few external employment options, refrained from taking risky but value-enhancing investments post-inspection.

Keywords: Managerial incentives, Anti-corruption, profitability, stated-owned enterprises

JEL Classification: D73, G34, P26

Suggested Citation

Megginson, William L. and Wang, Kedi and Xia, Junjie, The Unintended Consequence of Discipline Inspections as an Anti-Corruption Tool on Managerial Incentives (August 18, 2023). Available at SSRN: https://ssrn.com/abstract=4545237 or http://dx.doi.org/10.2139/ssrn.4545237

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

Kedi Wang

Beijing Institute of Technology ( email )

Beijing, 102488
China

Junjie Xia

Central University of Finance and Economics ( email )

Beijing
China

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

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