Communist party direct control and corporate investment efficiency: evidence from China

Abstract

Many communist countries, such as China, place emphasis on fixed-asset investments in their process of economic development. Governments push the policy using state-owned enterprises (SOEs) via a communist party committee (CPC). Political and agency costs make SOE investment sub-optimal. We examine the impact of firm-level CPC control on the investment efficiency among a sample of Chinese SOEs. We test agency problem overhaul and political entrenchment hypotheses. The results suggest that CPC control, in terms of having a CPC member as a director, supervisor, or senior executive, can improve investment efficiency, especially for overinvestment in SOEs. Our findings are robust to different measures of overinvestment and are more pronounced among locally controlled SOEs and SOEs with CEO/board chairman duality. Overall, our findings support the agency problem overhaul hypothesis. The involvement of a CPC member in the control of an SOE, on average, mitigates the agency cost and more than offsets the additional political cost incurred.