From 2013 onwards, the Chinese central government has subjected the largest state-owned enterprises (SOEs) to ‘disciplinary inspections’ to weed out and punish graft and other corruption. While this policy has been somewhat successful in punishing corruption—over 160 top SOE officials have been indicted—we show that the principal economic impact of these inspections has been to significantly cut investment by targeted firms, leading to a major decline in profitability, innovation and Tobin’s Q. Expenditures on R&D, entertainment, and travel also decline dramatically. The most obvious explanation is that the fear induced in SOE managers, who have limited risk-promoting equity holdings or incentive compensation and few external employment options, deterred them from taking risky but value-enhancing investments post-audit.

We decompose the difference between a firm’s market and book values into two components: intangible assets that can be created by competing firms through SG&A/R&D expenditures, and the residual denoted as franchise value (FV). The estimated parameters in the model for creating intangible assets by capitalizing R&D/SG&A expenditures vary significantly across industries. Consistent with FV being a measure of economic rents and quasi-rents, ceteris paribus, higher FV firms face fewer product market threats, have higher markups, and their investments are less sensitive to their total Tobin’s Q. In contrast, firms with higher capitalized intangible assets, face higher product market threats.

We study how financial constraints affect the process of firm agglomeration and, in particular, the creation of conglomerates and firms with subsidiaries. We focus on the constraints related to the geographical segmentation of the debt market. We argue that conglomerates/firms with subsidiaries are born as the outcome of a process of agglomeration around less financially constrained firms. This has three major implications: a) conglomerates (firm with subsidiaries) should be less financially constrained than single-segment (no-subsidiary) firms, b) the headquarters – in general the seat of the aggregating company – should be the least financially constrained unit of the new entity and therefore firms with subsidiaries should be more likely to borrow at the headquarters level, c) if conglomerates (firms with subsidiaries) are less financially constrained than the average firm in the market, their Tobin’s Q should be lower than that of the single-segment (no-subsidiary) firms in the same industries – i.e., they should display a “conglomerate (firm with subsidiaries) discount”. We test these hypotheses employing a novel – and exogenous – geographical-based measure of financial constraints. We focus on the US corporations from 1997 to 2004. We show that firms headquartered in less financially constrained areas are more likely to be headquarters of conglomerates/firms with subsidiaries and that conglomerates/firms with subsidiaries are less financially constrained. At the moment of agglomeration (M&A) we document a significant negative relation between the difference in a degree of financial constraints between the bidder and the target and the probability of choosing the target as well as the value created in M&A. In the years following the acquisition Tobin’s Q of acquirers are decreasing relative to their peers which is consistent with the fact that access to lower cost of financing allows to implement projects with marginal Q lower than the average Q of existing projects. Next, we find that the less financially constrained is the headquarters compared to the subsidiaries, the higher is the percentage of the total financing that takes place at headquarters level. Finally, we document a strong positive correlation between the difference in financial constraints of the conglomerate (firm with subsidiaries) and the average degree of financial constraints of the single-segment (no-subsidiary) firms and the conglomerate (firm with subsidiaries) discount. Our findings suggest that conglomerates/firms with subsidiaries are less constrained because less constrained firms take over more constrained ones.

This paper examines the effects of the agency costs on firm performance in 156 Chinese publicly listed companies with private ultimate owners between 2002 and 2007. The ultimate owners’ agency costs are measured by the divergence between cash flow rights and control rights. Agency costs are shown to negatively and significantly affect firm performance, as measured by Tobin’s Q. A major contribution of this paper is to identify connected party transactions as a channel through which such agency costs exert negative impact firm performance. Evidence from the public record of law violations of those firms lends further support to the “tunneling” view on the connected party transactions. The paper also shows that the larger the divergence, the less likely that firm managers will implement value-increasing industrial diversification. The last finding remains a puzzle.

We seek to exam the government’s role on post-privatization performance in China. Using a sample of 514 firms privatized for the period from 1996 to 2002, we find evidence that the government’s role could be both positive and negative. On the one hand, firms with politically connected CEOs have significant higher return on sales (ROS) than firms with non-politically connected CEOs both before and after listing; and CEO’s political connection has a positive effect on firms with debt burden. Also there is a significantly positive relationship between the proportion of shares owned by Government Agencies and Tobin’s Q. On the other hand, firms with politically connected CEOs underperformance firms with non-politically connected CEOs in terms of ROS change after listing, and, a significantly negative relationship is found between the proportion of shares owned by Government Agencies and postprivatization ROS.