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Communist party direct control and corporate investment efficiency: evidence from China

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  • Xiaorong Li
  • Kam C. Chan
  • Haitao Ma

Abstract

Many communist countries, such as China, place emphasis on fixed-asset investments in their process of economic development. Governments push the policy using state-owned enterprises (SOEs) via a communist party committee (CPC). Political and agency costs make SOE investment sub-optimal. We examine the impact of firm-level CPC control on the investment efficiency among a sample of Chinese SOEs. We test agency problem overhaul and political entrenchment hypotheses. The results suggest that CPC control, in terms of having a CPC member as a director, supervisor, or senior executive, can improve investment efficiency, especially for overinvestment in SOEs. Our findings are robust to different measures of overinvestment and are more pronounced among locally controlled SOEs and SOEs with CEO/board chairman duality. Overall, our findings support the agency problem overhaul hypothesis. The involvement of a CPC member in the control of an SOE, on average, mitigates the agency cost and more than offsets the additional political cost incurred.

Suggested Citation

  • Xiaorong Li & Kam C. Chan & Haitao Ma, 2020. "Communist party direct control and corporate investment efficiency: evidence from China," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 27(2), pages 195-217, March.
    • Handle: RePEc:taf:raaexx:v:27:y:2020:i:2:p:195-217
    DOI: 10.1080/16081625.2018.1470541
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    Cited by:

    1. Han Yu & Abraham Nahm & Zengji Song, 2023. "State‐owned enterprises' political capital, city administrative rank and economic resources acquisition: Empirical evidence from Chinese capital markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 28-42, January.
    2. Wang, Shengbin & Zheng, Jiafeng & Tu, Yongqian, 2023. "The Communist Party of China embedded in corporate governance and enterprise value: Evidence from state-owned enterprises," Finance Research Letters, Elsevier, vol. 54(C).
    3. Xie, Sujuan & Lin, Bingxuan & Li, Jingjing, 2022. "Political Control, Corporate Governance and Firm Value: The Case of China," Journal of Corporate Finance, Elsevier, vol. 72(C).
    4. Gu, Yun & Yang, Zhaohui, 2023. "The more red the greener? How the Communist Party of China's party organizations influences corporate green innovation," Finance Research Letters, Elsevier, vol. 55(PA).
    5. Tan, Xue & Yu, Lin & Fung, Hung-Gay, 2022. "Firms with short-termism: Evidence from expatriate controlling shareholders," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    6. Veena L. Brown & Erica E. Harris, 2023. "The Association of Female Leaders with Donations and Operating Margin in Nonprofit Organizations," Journal of Business Ethics, Springer, vol. 185(1), pages 223-243, June.

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