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Social Stability and Resource Allocation within Business Groups

Haikun Zhu ()
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Haikun Zhu: Tilburg University

No 79, Working Papers Series from Institute for New Economic Thinking

Abstract: Using datasets on transactions within business groups and social sentiment in China, I show that state-owned enterprises (SOEs) use internal funds to address social unrest, complying with the government`s political goals. I use plausibly unexpected shocks to regional stability to analyze the response of SOEs to these events. I find that the government, as the controlling shareholder, adopts a carrot-and-stick approach. The government offers a `carrot` by injecting funds into SOEs located in the affected areas, which are then used to generate benefits to the public, such as larger labor payments and additional capital expenditures. However, if there are severe political conflicts that threaten its authority, the government applies a `stick` by withdrawing resources. The SOEs channel seems effective because local sentiment recovers around shocks when SOEs offer more benefits. Additional tests show that the SOEs channel is significant in economic magnitude compared to fiscal redistribution. As a result of the transfer, SOEs lose value after shocks, but firms in the region improve their performance later. This paper provides new evidence on how the intra-group allocation of resources incorporates political objectives, and has socioeconomic impact.

Keywords: business groups; internal capital market; political economy; social stability (search for similar items in EconPapers)
JEL-codes: G32 G34 D74 P16 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2018-08
New Economics Papers: this item is included in nep-cna
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