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Title: State Capitalism vs. Private Enterprise

Author(s): Donghua Chen, Dequan Jiang, Alexander P. Ljungqvist, Haitian Lu and Mingming Zhou

Publication Date: February 2015

Keyword(s): business groups, internal capital markets, private enterprise and state capitalism

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Chen, D, Jiang, D, Ljungqvist, A, Lu, H and Zhou, M. 2015. 'State Capitalism vs. Private Enterprise'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10423