The impact of high-pressure political reforms on state-owned enterprises: Evidence from China

Taking the case of high-pressure political reforms including the ongoing anti-corruption campaign in China, we investigate the impact of such reforms on the performance of Chinese state-owned enterprises (SOEs) from the agency problem perspective. We report that before the reforms, SOEs significantly underperform non-SOEs in most performance measures, consistent with the existing evidence. Following the reforms, however, the performance gaps between SOEs and non-SOEs become insignificant or even reversed. Our results of positive impacts of the reforms on overall performance, cost control, operating efficiency and cash positions and their negative impacts on investment levels and efficiency for SOEs are in supportive of our hypotheses based on the agency theory. We further find that the state as SOEs' controlling shareholder is the primary beneficiary of the reforms through higher tax collections from SOEs, though incurring a loss in shareholder stock returns. We also report a few cases of industry heterogeneity in the impacts. Our results lend strong evidence that the political reforms empower the state to deter SOEs' corrupt practices and align their business decisions with the state's political objectives mainly by mitigating agency problems in Chinese SOEs.