State Capitalism vs. Private Enterprise

Alexander Ljungqvist (), Donghua Chen, Haitian Lu, Dequan Jiang and Mingming Zhou ()

No 10423, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the efficiency of internal capital markets at state-controlled and privately owned business groups in China. Using highly granular data on within-group capital flows, we document stark differences: while private groups allocate more capital to units with better investment opportunities, state groups do the opposite. Minority shareholders in state owned firms suffer as a result. Product market competition and external monitoring by outside investors help discipline state groups? tendency to ignore investment opportunities. We conjecture that capital allocations at state groups reflect the private career objectives of their chairmen. We show that promotion depends not on increasing profitability but on avoiding layoffs. Consistent with a career motive, we find that capital allocations are used to prop up large and struggling employers, but only if the chairman has a realistic chance of being promoted and if the cost of self-interested behavior is not too high.

Keywords: Business groups; Internal capital markets; Private enterprise; State capitalism (search for similar items in EconPapers)
JEL-codes: G15 G31 G32 G34 (search for similar items in EconPapers)
Date: 2015-02
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Citations: View citations in EconPapers (22)

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