Do Private Strategic Investors Improve Capital Allocation Efficiency of SOEs? Evidence from China

Introducing private strategic investors (PSIs) is an important way for Chinese state-owned enterprises (SOEs) to implement mixed-ownership reform today. Based on the data of the Chinese listed SOEs, this study assesses the impact of PSIs on SOEs' capital allocation efficiency manifested in sensitivity of investment to growth opportunities. We find that PSIs could significantly improve capital allocation. In particular, the shareholding ratio and top management ratio of PSIs have an inverted U-shaped and positive impact on capital allocation, respectively. Furthermore, we investigate four underlying mechanisms based on principal-agency and resource perspectives. Finally, we investigate the effects of heterogeneous PSIs, and discover that PSIs from regions with higher levels of marketization yield greater benefits. Prior to 2013, foreign PSIs played a more positive role than their domestic counterparts, but this became the opposite after 2013.