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What Gets Measured Gets Managed: Investment and the Cost of Capital

Zhiguo He (), Guanmin Liao and Baolian Wang
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Guanmin Liao: Renmin U of China
Baolian Wang: U of Florida

Research Papers from Stanford University, Graduate School of Business

Abstract: We study the impact of government-led incentive systems by examining a staggered reform in the Chinese state-owned enterprise (SOE) performance evaluation policy. To improve capital allocative efficiency, regulators switched from using return on equity (ROE) to economic value added (EVA). However, this EVA policy takes a one-size-fits-all approach by stipulating a fixed cost of capital for virtually all SOEs, neglecting the potential heterogeneity of firm-specific costs of capital. We show that SOEs responded to the evaluation reform by altering their investment decisions, particularly when the actual borrowing rate deviated further from the stipulated rate. Besides providing an estimate of the cost of capital's impact on investment, our paper offers causal evidence that incentive schemes affect real investment and sheds new light on economic reform challenges in China.

JEL-codes: G31 G34 M12 M52 P31 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-cfn, nep-cna, nep-eff and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:4135

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