Unlocking the Myths of Asset Size Expansion of China's Large SOEs - Theory and Evidence

This paper proposes a theoretical framework to illustrate the incentives of the exponential growth of the asset size of China’s large state-owned enterprises in the past decades. We come up with the views that there are 3 types of incentives that lead to the expansion of asset size of large SOEs in China. First, the SOE manager is interested in maximizing her/his own private control of benefits through expanding the asset size of SOEs, which we call the business empire building effect. Second, the state seeks more tax revenue through the larger asset size of SOEs, which could be called the state predatory effect. Third, state benevolent effect in which the state is also concerned with ‘social welfare’ in terms of increasing labour hiring or larger asset size of SOEs for the sake of social stability. The empirical evidences presented in the end are broadly consistent with the theories proposed in the paper. Our empirical results are also robust when the simultaneous equation techniques are used. In the end of the paper, we also use the IV regression in order to resolve the problems of endogeneity.