Research On Inefficient Investment Behavior Of Central SOEs

In recent years, large amounts of investments have been made to promotedevelopment of economy with GDP growing rapidly, which has been termed as investment-driven growth.The present non-balanced state and the emerging motivations for innovation have been playing an influential role in investment behaviors and investment efficiency of enterprises. From the perspective of the overall investment structure, high investments result in decreasing of investment efficiency.Problems such as low investment efficiency and high opportunity cost have been particularly among state-owned enterprises’(SOEs here in after). The uniqueness of SOEs’ investment behaviors is determined by both traditionally studied agency problems and specific characteristics of development pattern of Chinese economy.Compared to private enterprises that have clearly established ownership, SOEs not only obey principal-agent rules that separate owner’s rights and management’s rights, but also suffer from other sorts of principal-agent risks. This is possibly the cause for SOEs’ high marginal costs and soft budget constraints.In addition, governments have intervened in micro economic activities excessively, which is totally distinct from western economies.With the increasingly perplex reform and development environment, the basic idea of future reform in SOEs converges to a ―refined and classified reform‖. Aiming at investigating the effect these factors have on SOEs’ investment behaviors, find out the determinants of SOEs’ inefficient, this thesis study the SOEs controlled by State-Owned Assets Supervision and Administration Commission(SASAC hereinafter). I make a comparison analysis of investment efficiency and the determinants of over-investments among different types of central SOEs. I also investigate the effects of implementation of EVA on over-investment across various types of SOEs.To begin with, I categorize the 112 central SOEsthat are supervised by State-owned Assets Supervision and Administration Commissioninto three groups: political, functional and competitive enterprises, following the extant researches concerning classification of SOEs.I measure the extent of inefficient investment of listed central SOEs based on a sample including unbalanced panel data of 220 firm-year observations since the foundation of SASAC to the end of 2013. Evidence shows that listed central SOEs made investments more in consideration of firm size than of profitability, which reflects the investment inefficiency. I find the existence of inefficient investments among central SOEs, including both under-investments and over-investments. But in terms of frequency and extent of inefficiency, over-investments outrun under-investments. I also conduct comparison analysis between functional enterprises and competitive enterprises and find significant differences in over-investments, but not in under-investments.After summarizing the factors that probably lead to inefficient investment, I find that government interferences caused by Fiscal decentralization reform and state-owned-enterprises reform and management’s self-serving incentives are important determinants for SOEs’ over-investments. Using observations that are implicated with over-investments, I further study the different determinants for central SOEs’ investment inefficiency using both modeling and empirical analyses. The results show that over-investments in functional central SOEs are more likely to be caused by government interferences while over-investments in competitive central SOEs are more likely to be caused by managers’ self-serving incentives, which indicate the necessity of classification among central SOEs when analyzing their over-investments. In other words, we need to take into consideration the characteristics of central SOEs, which highlights the necessityof classified governance for SOEs.In addition, I investigate the potential effect of application of Economic Added Value(EVA) on central SOEs’ over-investments. In particular, I investigate whether or not there is differentiated inhibiting effect of EVA among types of central SOEs as over-investments in functional central SOEs are more likely to be caused by government interferences while over-investments in competitive central SOEs are more likely to be caused by managers’ self-serving incentives. The empirical results show that overall the application of EVA have restrained the over-investments in central SOEs and this effect is more prominent in functional central SOEs. And it means that to some extent, the effect of EVA application across central SOEs still needs improvement, which again shows that we need to consider the specific conditions of different types of central SOEs if we are to solve the problem of over-investments.My analyses provide a more comprehensive and objective understanding of China’s listed central SOEs’ investment efficiency and inefficient investments. I also put forwards more targeted and timely suggestions to improve central SOEs’ investment efficiency. To enhance central SOEs’ investment behaviors, we need more than just to improve the internal governance systems; State-Owned Assets Supervision and Administration Commission should clarify the power and position of related departments and provide more targeted administration and supervision over different types of central SOEs. Also a more scientific and proper incentive and restraint mechanism is needed for managers. Based on diversified management of SOEs, state-owned assets should be invested in areas of special demands to fully exploit the advantages, in response to the advocate of ―promoting state-owned capital investment in industries and areas that are concerned with national security and national economic lifelines, and constantly enhancing the vitality of state-owned economy, control and influence‖. For competitive enterprises, the introduction of strategic investors can be likely new dynamic and risk constraints mechanism. All these would be helpful to improve investment efficiency and to keep and rise up SOEs’ asset value.I contribute to the extant literature in a number of ways: first, as the reform in SOEs is developing in depth in China, the samples in my study are more representative. Central SOEs serve as the backbone of the national economy and the main body of state-owned economy. They represent the main forces to participate in international competition while prior literature scarcely focus on the investment efficiency issues of central SOEs. Secondly, I categorize the central SOEs into different types and compare the investment efficiency across the types, which makes my study more targeted. Unlike prior researches that treat all SOEs as homogenous, I discriminate SOEs and divide them into three categories: political, functional and competitive enterprises and accordingly investigate inefficient investments across these categories. Thirdly, I examine the two main determinants of inefficient investments, government interferences and management’s self-serving incentives, across different types of central SOEs.In addition I examine the effects of implementation of EVA on over-investment across various types of SOEs. Up to the present, there are only a few researches exploring the institutional causes for SOEs’ inefficient investment and they fail to disentangle traditional agency hypotheses and government interferences. In my thesis I further distinguish these factors and provide evidence that governments affect micro economies, enriching the literature on the relationship of governments and companies. My thesis echoes the SASAC’s demand for classified management for SOEs, therefore has timeliness and practical values.With the development of classification and classified management for SOEs, there will be big space for further research. My thesis is an exploratory study to classify the central SOEs and to investigate the differentiated investment efficiency, which is a bold attempt to answer the need for theory development and practical appeals. I hope my thesis could provide a more targeted theoretical analysis and more practical decision making references for improving the investment efficiency and development of reform in SOEs. Also I hope it could inspire further researches in related areas.