Honor Thy Creditors Beforan Thy Shareholders: Are the Profits of Chinese State-Owned Enterprises Real?
AbstractChinese state-owned enterprises (SOEs) have become quite profitable recently. As the largest shareholder, the state has not asked SOEs to pay dividends in the past. Therefore, some have suggested that the state should ask SOEs to pay dividends. Indeed, the Chinese government has adopted this policy advice and started to demand back dividend payments starting from 2008. Although we do not question the soundness of the dividend policy, the point we raise is whether those profits are real if all costs owed by SOEs are properly accounted for. Among others, we are interested in investigating whether the profits of SOEs are still as large as they claim if they were to pay a market interest rate. Using a representative sample of corporate China, we find that the costs of financing for SOEs are significantly lower than for other companies after controlling for some fundamental factors for profitability and individual firm characteristics. In addition, our estimates show that if SOEs were to pay a market interest rate, their existing profits would be entirely wiped out. Our findings suggest that SOEs are still benefiting from credit subsidies, and they are not yet subject to the market interest rates. In an environment where credit rights are not fully respected, dividend policy, though important, should come second and not first. (c) 2010 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.
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Bibliographic InfoArticle provided by MIT Press in its journal Asian Economic Papers.
Volume (Year): 9 (2010)
Issue (Month): 3 (October)
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Web page: http://mitpress.mit.edu/journals/
Other versions of this item:
- Giovanni Ferri & Li-Gang Liu, 2009. "Honor Thy Creditors Beforan Thy Shareholders: Are the Profits of Chinese State-Owned Enterprises Real?," Working Papers 162009, Hong Kong Institute for Monetary Research.
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
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