Research On Inefficient Investment Governance Of SOEs Based On EVA Performance Evaluation

Since the State-owned Enterprise (SOE) reform in1998, state-owned enterprises’ investments have maintained a large size and a high growth rate. State-owned enterprises have been the subject of Chinese fixed asset investment. The investment efficiency of state-owned enterprises determines the direction and trends of investment efficiency of business in China. Since the21st century, our country has implemented a proactive fiscal policy in order to stimulate domestic demand. And business investment in fixed assets has been steadily rising. However, the increasing size of business investment associated with lower investment efficiency. The investment inefficiency of SOEs is especially serious. In the particular context of our country, there are some inefficient investment problems in the state-owned enterprises. The inefficiency of state-owned enterprise investment behavior poses a serious risk to the sustainable economic development in our country. Despite the low return on investment, Chinese state-owned enterprises still have a great impulse to invest, and waste a lot of social resources. The reason is mainly due to the principal-agent conflict between shareholders and management. As the owner of state-owned enterprises is absent for a long time, insiders control problems are common. So Investment efficiency of SOEs is low. Over the years, managers of the state-owned enterprises have pursued expansion of enterprise scale ignoring the output and efficiency of capital investment, resulting in over-investment phenomenon.For the over-investment issue, the SASAC decides to promote economic value-added performance evaluation in central SOEs from2010to formulate investment behavior. And the Local SASAC has carried out the preparatory work of EVA performance evaluation. Different from traditional accounting indicators, EVA examines the company’s "surplus profit"(operating profit deducting the cost of debt capital and equity capital). The calculation of EVA determines that it will remind those managers to pay attention to equity capital and curb the urge to over-investment. However, the calculation formula of EVA may also lead to the managers’ short-term behavior, and blindly reduce the scale of investment, rather than by increasing the net operating profit after tax to increase EVA. Therefore, whether EVA can inhibit over-investment behavior, and whether it will bring under-investment behavior, the question needs to be tested with empirical data. Such a large scale of EVA performance evaluation is first at home and abroad. Therefore, this thesis will take advantage of the valuable sample of Central SOEs to research EVA performance evaluation’s governance effects on corporate investment behavior. This study has important practical and theoretical value to strengthen the EVA application of Chinese enterprises to increase the value of investment s and to improve the investment efficiency of state-owned enterprises.Firstly, this thesis sorts business investment and EVA literatures inside and abroad. Secondly, it analyses the theoretical basis from the capital investment theory, agency theory and incentive theory point of view. Again, it builds a theoretical framework to analyse the economic dynamic of inefficient investment of central SOEs and the mechanism of EVA’s influence on investment behavior. Based on this, the thesis analyses empirically the changes in the investment behavior after EVA performance evaluation is implemented. Empirical study shows that EVA performance evaluation can inhibit the excessive investment. And there is no evidence to show that EVA performance can lead to under-investment opportunistic behavior. Finally, this thesis put forward relevant policy based on theoretical analysis and empirical test.The innovations of this study are:Firstly, this thesis analyses how EVA can be a governance tool to smooth the agency of SOEs from its basic principle, and has expanded the studies of inefficient investment governance mechanism. Present researches about investment governance mainly discuss from the perspectives of board structure, large shareholder ownership, outside governance environment, debt contingent governance and dividends distribution. There is no paper to discuss from the view of performance evaluation. This thesis firstly studies investment governance of SOEs from the aspect of EVA performance evaluation. It can extend the investment governance study.Secondly, this thesis not only considers the over-investment of SOEs, but also analyses the under-investment of SOEs. The investment governance literatures in our country maily discuss over-investment. There are few papers about under-investment. The reason maybe is that capital wasting is an important issue for SOEs. However, under-investment of firms is objectively existed. So it should be paid more attention. Also, present researches mainly discuss how to governance over-investment. But they ignore a question:whether the governance mechanism to correct over-investment can result in under-investment. One innovation of this thesis is to study whether EVA performance evaluation can result in under-investment while prohibiting over-investment.Thirdly, this thesis uses the data of firms in our country to test the effect of EVA. The SASAC uses EVA to evaluate the performance of managers in central SOEs. And the calculation method of EVA is different from foreign countries. This has offered a good opportunity to researches about the governance effect of EVA. Different to present studies, this thesis uses central SOEs that actually have carried out EVA performance evaluation as sample to test the effect of EVA performance evaluation on SOE inefficient investment. So, this thesis can actually tests whether EVA performance evaluation ca n smooth the agency problem of SOEs to promote investment efficiency, and can actually provides feasible suggestions for firms in our country. This thesis enriches studies about EVA implement and inefficient investment governance.