The Executive Power of State-owned Enterprise and Overinvestment

The paper studies the overinvestment of state-owned enterprises.There are two main reasons we choose the topic;First,one of the most important problem in China's economic development is the enterprise's investment efficiency,but Chinese enterprises' investment efficiency is not optimistic(Ying Luo,2012),especially the overinvestment of state-owned enterprises.Liu Li(2013) argue that the state-owned enterprises are eager to develop rapidly and become bigger and stronger,the problem of overinvestment is serious.From this perspective,It is more necessary to study the overinvestment of state-owned enterprises than other types of enterprises.Second,there are shortcomings in the academic literatures of the overinvestment of state-owned enterprises.The existing literatures explain the overinvestment phenomenon of the state-owned enterprises in China mainly from the perspectives of corporate governance and government intervention.The perspective of corporate governance argues that managers have the empire building motivation,and overinvest to obtain private benefits.The perspective of government intervention argues that,China's state-owned enterprises are influenced by government intervention,in order to implement targets the government issued,such as keeping a stable employment,raising taxes and increasing GDP,China's state-owned enterprises want to overinvest,especially in China's decentralization reform,the political performance goal of local government has inspired the intervention of the state-owned enterprises,local governments make the phenomenon of overinvestment of state-owned enterprises more serious.This paper argues that studying overinvestment of state-owned enterprises from the perspective of corporate governance only emphasize the influence of corporate governance mechanism,ignored the heterogeneity of executives.Corporate governance theory argues that the company's decision will be the same as long as the corporate governance structure is the same(Bertrand Schoar,2012),in fact,the hypothesis of the corporate governance is that the executive is homogeneous,it does not accord with the actual,even if the company governance mechanism is the same,due to the influence of personal physical,psychological and personal experience,executives' decision will be very different.There is no denying the fact that it is suitable for China's national conditions to study the overinvestment of state-owned enterprises from the perspective of government intervention,and has contributed to promote China's marketization reform,but along with the advancement of market-based reform,government intervention,less and less,but state-owned enterprises over-investment phenomenon is still serious,can not help but ask,whether there are other reasons? This paper argues that this part of research also ignores the heterogeneity of executives,especially not considering the fact of executives ' power become stronger due to the reform of state-owned enterprises,it is difficult to understand the essence of overinvestment of state-owned enterprises deeply and comprehensively.Liu Jiraporn(2010) argues that the power is one of the important dimensions of executive characteristics,when the company decision-making power concentrated in the hands of corporate executive officer(CEO),CEO has the power to impact at the discretion of the company decision,and then the individual will reflect in decision-making.Based on the institutional background of China,studying the phenomenon of overinvestment of state-owned enterprises from the executive power has important theory value and practical significance.This paper uses the new angle of view,the executive power,introducing social psychology theory,principal-agent theory and the theory of executive power,to explain the serious problem of overinvestment of state-owned enterprises.This paper shows that,The increase of the executive power is one of the important factors affecting overinvestment of state-owned enterprises,especially when government intervention is lower,the executive power can explain the overinvestment problem of state-owned enterprises well.The stronger the executive power,the more serious overinvestment problem of state-owned enterprises.Further research also find the significant positive correlation of executive power and overinvestment in the sample of poor legal environment and not listed in Hong Kong.It shows that a good legal environment can have binding force on the executives,at the same time establishing a perfect capital market system,help to reduce bad consequences caused by overinvestment increased by state executive power.This paper not only expand the economic consequences of executive power and the relevant theoretical research in the field of enterprise investment,but also provides a new direction for a new round of reform of state-owned enterprises and promoting the efficiency of corporate investment.