What Gets Measured Gets Managed: Investment and the Cost of Capital / Zhiguo He, Guanmin Liao, Baolian Wang.

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He, Zhiguo

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w29775.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We study the impact of government-led incentive systems by examining a staggered reform in the Chinese state-owned enterprise (SOE) performance evaluation policy. To improve capital allocative efficiency, in 2010, regulators switched from using return on equity (ROE) to economic value added (EVA) when evaluating SOE performance. This EVA policy adopts a one-size-fits-all approach by stipulating a fixed cost of capital for virtually all SOEs, ignoring the potential heterogeneity of firm-specific costs of capital. We show that SOEs did respond to the performance evaluation reform by altering their investment decisions, more so when the actual borrowing rate was further away from the stipulated cost of capital. Our paper provides causal evidence that incentive schemes affect real investment and sheds new light on challenges faced by economic reforms in China.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w29775 (Browse shelf(Opens below))	Not For Loan

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February 2022.

We study the impact of government-led incentive systems by examining a staggered reform in the Chinese state-owned enterprise (SOE) performance evaluation policy. To improve capital allocative efficiency, in 2010, regulators switched from using return on equity (ROE) to economic value added (EVA) when evaluating SOE performance. This EVA policy adopts a one-size-fits-all approach by stipulating a fixed cost of capital for virtually all SOEs, ignoring the potential heterogeneity of firm-specific costs of capital. We show that SOEs did respond to the performance evaluation reform by altering their investment decisions, more so when the actual borrowing rate was further away from the stipulated cost of capital. Our paper provides causal evidence that incentive schemes affect real investment and sheds new light on challenges faced by economic reforms in China.