IDEAS home Printed from https://ideas.repec.org/p/bir/birmec/22-04.html
   My bibliography  Save this paper

Political motives of excess leverage in state-owned firms

Author

Listed:
  • Oleksandr Talavera

    (University of Birmingham)

  • Shuxing Yin

    (University of Sheffield)

  • Mao Zhang

    (University of St Andrews)

Abstract

This study explores the political motives of excess leverage in state-owned firms. To measure the excess leverage, we follow Gao et al. (2013) to estimate how state firms would behave if they were non-state firms. Using a panel of Chinese firms, we find that, on average, state firms take excess leverage (i.e., overleveraged) compared to otherwise similar non-state firms. Examining the determinants of such leverage difference, our results suggest that the excess leverage of state-owned firms positively relates to regional unemployment pressure and economic pressure faced by municipal politicians. Such effects are more pronounced in local state-owned firms. Our paper provides evidence that government control leads to significant political influence over the real decisions of firms.

Suggested Citation

  • Oleksandr Talavera & Shuxing Yin & Mao Zhang, 2022. "Political motives of excess leverage in state-owned firms," Discussion Papers 22-04, Department of Economics, University of Birmingham.
    • Handle: RePEc:bir:birmec:22-04
    as

    Download full text from publisher

    File URL: https://repec.cal.bham.ac.uk/pdf/22-04.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Daniel Carvalho, 2014. "The Real Effects of Government-Owned Banks: Evidence from an Emerging Market," Journal of Finance, American Finance Association, vol. 69(2), pages 577-609, April.
    2. Dong, Yizhe & Meng, Chao & Firth, Michael & Hou, Wenxuan, 2014. "Ownership structure and risk-taking: Comparative evidence from private and state-controlled banks in China," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 120-130.
    3. Gao, Huasheng & Harford, Jarrad & Li, Kai, 2013. "Determinants of corporate cash policy: Insights from private firms," Journal of Financial Economics, Elsevier, vol. 109(3), pages 623-639.
    4. Xiaping Cao & Michael Lemmon & Xiaofei Pan & Meijun Qian & Gary Tian, 2019. "Political Promotion, CEO Incentives, and the Relationship Between Pay and Performance," Management Science, INFORMS, vol. 65(7), pages 2947-2965, July.
    5. Yang Yao & Muyang Zhang, 2015. "Subnational leaders and economic growth: evidence from Chinese cities," Journal of Economic Growth, Springer, vol. 20(4), pages 405-436, December.
    6. Fuxiu Jiang & Kenneth A Kim, 2020. "Corporate Governance in China: A Survey [The role of boards of directors in corporate governance: a conceptual framework and survey]," Review of Finance, European Finance Association, vol. 24(4), pages 733-772.
    7. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-319, March.
    8. Lin, Justin Yifu & Cai, Fang & Li, Zhou, 1998. "Competition, Policy Burdens, and State-Owned Enterprise Reform," American Economic Review, American Economic Association, vol. 88(2), pages 422-427, May.
    9. Borisova, Ginka & Fotak, Veljko & Holland, Kateryna & Megginson, William L., 2015. "Government ownership and the cost of debt: Evidence from government investments in publicly traded firms," Journal of Financial Economics, Elsevier, vol. 118(1), pages 168-191.
    10. Cull, Robert & Xu, Lixin Colin, 2000. "Bureaucrats, State Banks, and the Efficiency of Credit Allocation: The Experience of Chinese State-Owned Enterprises," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 1-31, March.
    11. Qigui Liu & Gary Tian & Xiaoming Wang, 2011. "The effect of ownership structure on leverage decision: new evidence from Chinese listed firms," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 16(2), pages 254-276.
    12. Chen, Ye & Li, Hongbin & Zhou, Li-An, 2005. "Relative performance evaluation and the turnover of provincial leaders in China," Economics Letters, Elsevier, vol. 88(3), pages 421-425, September.
    13. Brandt, Loren & Li, Hongbin, 2003. "Bank discrimination in transition economies: ideology, information, or incentives?," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 387-413, September.
    14. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    15. Jiang, Wei & Zeng, Yeqin, 2014. "State ownership, bank loans, and corporate investment," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 92-116.
    16. Bliss, Mark A. & Gul, Ferdinand A., 2012. "Political connection and cost of debt: Some Malaysian evidence," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1520-1527.
    17. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    18. Fan, Joseph P.H. & Wong, T.J. & Zhang, Tianyu, 2007. "Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms," Journal of Financial Economics, Elsevier, vol. 84(2), pages 330-357, May.
    19. Cui, Huimin & Mak, Y. T., 2002. "The relationship between managerial ownership and firm performance in high R&D firms," Journal of Corporate Finance, Elsevier, vol. 8(4), pages 313-336, October.
    20. Livingston, Miles & Poon, Winnie P.H. & Zhou, Lei, 2018. "Are Chinese credit ratings relevant? A study of the Chinese bond market and credit rating industry," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 216-232.
    21. Chong-En Bai & Jiangyong Lu & Zhigang Tao, 2006. "The Multitask Theory of State Enterprise Reform: Empirical Evidence from China," American Economic Review, American Economic Association, vol. 96(2), pages 353-357, May.
    22. Lin William Cong & Haoyu Gao & Jacopo Ponticelli & Xiaoguang Yang, 2019. "Credit Allocation Under Economic Stimulus: Evidence from China," Review of Financial Studies, Society for Financial Studies, vol. 32(9), pages 3412-3460.
    23. Wang, Qian & Wong, T.J. & Xia, Lijun, 2008. "State ownership, the institutional environment, and auditor choice: Evidence from China," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 112-134, September.
    24. Zou, Hong & Adams, Mike B., 2008. "Debt Capacity, Cost of Debt, and Corporate Insurance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(2), pages 433-466, June.
    25. Liu Wang & William Judge, 2012. "Managerial ownership and the role of privatization in transition economies: The case of China," Asia Pacific Journal of Management, Springer, vol. 29(2), pages 479-498, June.
    26. Firth, Michael & Fung, Peter M.Y. & Rui, Oliver M., 2006. "Corporate performance and CEO compensation in China," Journal of Corporate Finance, Elsevier, vol. 12(4), pages 693-714, September.
    27. Juan Pedro Sanchez-Ballesta & Emma Garcia-Meca, 2011. "Ownership Structure and the Cost of Debt," European Accounting Review, Taylor & Francis Journals, vol. 20(2), pages 389-416.
    28. Dong, Yan & Liu, Zhentao & Shen, Zhe & Sun, Qian, 2016. "Does State Ownership Really Matter in Determining Access to Bank Loans? Evidence from China's Partial Privatization," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 73-85.
    29. Guofu Tan & Justin Yifu Lin, 1999. "Policy Burdens, Accountability, and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 426-431, May.
    30. An, Heng & Chen, Yanyan & Luo, Danglun & Zhang, Ting, 2016. "Political uncertainty and corporate investment: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 174-189.
    31. Shashwat Alok & Meghana Ayyagari, 2020. "Politics, State Ownership, and Corporate Investments," Review of Financial Studies, Society for Financial Studies, vol. 33(7), pages 3031-3087.
    32. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
    33. Alvaro Cuervo-Cazurra & Andrew Inkpen & Aldo Musacchio & Kannan Ramaswamy, 2014. "Governments as owners: State-owned multinational companies," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 45(8), pages 919-942, October.
    34. Andrei Shleifer & Robert W. Vishny, 1994. "Politicians and Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 995-1025.
    35. Ginka Borisova & William L. Megginson, 2011. "Does Government Ownership Affect the Cost of Debt? Evidence from Privatization," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2693-2737.
    36. Li, Kai & Yue, Heng & Zhao, Longkai, 2009. "Ownership, institutions, and capital structure: Evidence from China," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 471-490, September.
    37. Bradshaw, Mark & Liao, Guanmin & Ma, Mark (Shuai), 2019. "Agency costs and tax planning when the government is a major Shareholder," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 255-277.
    38. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, vol. 61(6), pages 2597-2635, December.
    39. Jie Gan & Yan Guo & Chenggang Xu, 2018. "Decentralized Privatization and Change of Control Rights in China," Review of Financial Studies, Society for Financial Studies, vol. 31(10), pages 3854-3894.
    40. Shailer, Greg & Wang, Kun, 2015. "Government ownership and the cost of debt for Chinese listed corporations," Emerging Markets Review, Elsevier, vol. 22(C), pages 1-17.
    41. Chen, Shimin & Sun, Zheng & Tang, Song & Wu, Donghui, 2011. "Government intervention and investment efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 259-271, April.
    42. Paul H. Malatesta & Kathryn L. DeWenter, 2001. "State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity," American Economic Review, American Economic Association, vol. 91(1), pages 320-334, March.
    43. Chen, Ting & Kung, J.K.-S., 2016. "Do land revenue windfalls create a political resource curse? Evidence from China," Journal of Development Economics, Elsevier, vol. 123(C), pages 86-106.
    44. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-819, July.
    45. Karolyi, G. Andrew & Liao, Rose C., 2017. "State capitalism's global reach: Evidence from foreign acquisitions by state-owned companies," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 367-391.
    46. Zhaoyang Gu & Song Tang & Donghui Wu, 2020. "The Political Economy of Labor Employment Decisions: Evidence from China," Management Science, INFORMS, vol. 66(10), pages 4703-4725, October.
    47. Ronald Coase & Ning Wang, 2012. "China in Transition," Palgrave Macmillan Books, in: How China Became Capitalist, chapter 2, pages 22-40, Palgrave Macmillan.
    48. Qingyuan Li & Chen Lin & Li Xu, 2020. "Political Investment Cycles of State-Owned Enterprises," Review of Financial Studies, Society for Financial Studies, vol. 33(7), pages 3088-3129.
    49. Yuan Ding & Hua Zhang & Junxi Zhang, 2007. "Private vs State Ownership and Earnings Management: evidence from Chinese listed companies," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(2), pages 223-238, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Qiankun Gu & Jeong‐Bon Kim & Ke Liao & Yi Si, 2023. "Decentralising for local information? Evidence from state‐owned listed firms in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 5245-5276, December.
    2. Fuxiu Jiang & Kenneth A Kim, 2020. "Corporate Governance in China: A Survey [The role of boards of directors in corporate governance: a conceptual framework and survey]," Review of Finance, European Finance Association, vol. 24(4), pages 733-772.
    3. Goodell, John & Li, Mingsheng & Liu, Desheng, 2021. "Price informativeness and state-owned enterprises: Considering their heterogeneity," International Review of Financial Analysis, Elsevier, vol. 76(C).
    4. Zhi Wang & Miao Yu, 2022. "Political embeddedness and firms' growth," Kyklos, Wiley Blackwell, vol. 75(1), pages 127-153, February.
    5. Megginson, William L. & Ullah, Barkat & Wei, Zuobao, 2014. "State ownership, soft-budget constraints, and cash holdings: Evidence from China’s privatized firms," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 276-291.
    6. Johansson, Anders C. & Luo, Danglun & Rickne, Johanna & Zheng, Wei, 2016. "Government Intervention in the Capital Allocation Process: Firm Employment as an IPO Selection Rule in China," Stockholm School of Economics Asia Working Paper Series 2016-40, Stockholm School of Economics, Stockholm China Economic Research Institute.
    7. Zhang, Dongyang & Liu, Deqiang, 2017. "Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?," Economic Systems, Elsevier, vol. 41(2), pages 179-202.
    8. Daniliuc, Sorin & Guo, Hui & Wee, Marvin, 2023. "The usefulness of financial advisors to government-influenced Chinese acquirers," Global Finance Journal, Elsevier, vol. 55(C).
    9. Liu, Qigui & Pan, Xiaofei & Tian, Gary Gang, 2018. "To what extent did the economic stimulus package influence bank lending and corporate investment decisions? Evidence from China," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 177-193.
    10. Zhang, Wei & Xiong, Xiong & Wang, Guanying & Li, Chunxia, 2022. "Corporate ownership and political connections: Evidence from post-IPO long term performance in China," Research in International Business and Finance, Elsevier, vol. 59(C).
    11. Johansson, Anders C. & Luo, Danglun & Rickne, Johanna & Zheng, Wei, 2017. "Government intervention in the capital allocation process: Excess employment as an IPO selection rule in China," China Economic Review, Elsevier, vol. 44(C), pages 271-281.
    12. Liu, Li & Liu, Qigui & Tian, Gary & Wang, Peipei, 2018. "Government connections and the persistence of profitability: Evidence from Chinese listed firms," Emerging Markets Review, Elsevier, vol. 36(C), pages 110-129.
    13. Ciprian Stan & Mike Peng & Garry Bruton, 2014. "Slack and the performance of state-owned enterprises," Asia Pacific Journal of Management, Springer, vol. 31(2), pages 473-495, June.
    14. Luo, Kun & Lim, Edwin KiaYang & Qu, Wen & Zhang, Xuan, 2021. "Board cultural diversity, government intervention and corporate innovation effectiveness: Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(2).
    15. Boubakri, Narjess & El Ghoul, Sadok & Guedhami, Omrane & Hossain, Mahmud, 2020. "Post-privatization state ownership and bank risk-taking: Cross-country evidence," Journal of Corporate Finance, Elsevier, vol. 64(C).
    16. Piotroski, Joseph D. & Zhang, Tianyu, 2014. "Politicians and the IPO decision: The impact of impending political promotions on IPO activity in China," Journal of Financial Economics, Elsevier, vol. 111(1), pages 111-136.
    17. Shailer, Greg & Wang, Kun, 2015. "Government ownership and the cost of debt for Chinese listed corporations," Emerging Markets Review, Elsevier, vol. 22(C), pages 1-17.
    18. He, Yan & Chiu, Yung-ho & Zhang, Bin, 2015. "The impact of corporate governance on state-owned and non-state-owned firms efficiency in China," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 252-277.
    19. Dong, Yi & Hou, Qiannan & Ni, Chenkai, 2021. "Implicit government guarantees and credit ratings," Journal of Corporate Finance, Elsevier, vol. 69(C).
    20. Xinyu Yu & Ping Wang, 2020. "Government control and the value of cash: evidence from listed firms in China," Review of Quantitative Finance and Accounting, Springer, vol. 55(4), pages 1341-1369, November.

    More about this item

    Keywords

    excess leverage; state-owned firms; political motives; unemployment and economic pressure;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bir:birmec:22-04. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oleksandr Talavera (email available below). General contact details of provider: https://edirc.repec.org/data/debhauk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.