Ownership structure and investment decisions of Chinese SOEs

• Published in: Research in international business and finance 2018-01, Vol.43, p.48-57
• Main Authors: He, Wei, Kyaw, NyoNyo A.
• Format: Article
• Language: English
• Subjects: Corporate governance; Overinvestment; Ownership structure; SOE
• ISSN: 0275-5319; 1878-3384
• DOI: 10.1016/j.ribaf.2017.07.165

•The relation between ownership structure and overinvestment decisions by Chinese state owned enterprises (SOEs) is examined.•State owners are more committed to pursue their own sociopolitical agenda than to maximize wealth of its shareholders. The relation between state ownership and overinvestment is positive.•Managerial owners, who too receive non-negotiable shares, would discourage overinvestment lest it should inhibit the firm’s ability to pay dividends.•The state ownership has a negative impact while managerial ownership has a positive effect on underinvestment decisions. In this paper we examine the relation between ownership structure and overinvestment decisions by Chinese state owned enterprises (SOEs). We hypothesize that state owners, the largest block holders, are more committed to pursue their own sociopolitical agenda than maximizing wealth of its shareholders and show that the relation between state ownership and overinvestment is positive. We also hypothesize that managerial owners, who too receive non-negotiable shares, would discourage overinvestment lest it should inhibit the firm’s ability to pay dividends. Consistent with this hypothesis, we find a negative relation between management ownership and overinvestment. Conversely, our results show that the state ownership has a negative impact while managerial ownership has a positive effect on underinvestment decisions.