Can State-owned Shareholder Involvement Reduce Internal Income Disparity in Private Enterprises?—Empirical Evidence from Chinese Listed Companies
WANG Caiping, ZHANG Jiahao, HUANG Zhihong
International School of Business & Finance, Sun Yat-sen University; Advanced Institute of Finance, Sun Yat-sen University; School of Business Administration, South China University of Technology
Summary:
Achieving common prosperity is the essential requirement of socialism with Chinese characteristics. How to reduce income inequality without undermining the motivation of economic entities' effectiveness has become a significant issue of common concern in both academia and practice. This study,realizes that China has a vast scale of state-owned capital, which has deeply integrated with private capital through intricate equity structures and has significant impact on the operation and development of private enterprises. However, internal income disparity within private enterprises has been expanded. Therefore,this study holds substantial theoretical value and urgent practical necessity. Theoretically, there are two opposing views on whether internal income disparity should be expanded. Tournament theory holds that internal income disparity objectively reflects the real value of high-level talents, suggesting that paying executives higher salaries can motivate employees to work harder. Therefore, expanding internal income disparity might improve the performance of enterprises. On the other hand, social equity theory emphasizes that internal income disparity arises from differences in the levels of employees' effort, skills, and contributions to company performance. Employees compare their input and output with those of executives to evaluate the fairness of their income. Unfair distribution results can harm their motivation. Thus,expanding internal income disparity might reduce enterprise performance. By tracing the relevant literature, this study finds that the key reason for the divergence between the two theories is the failure of distinguishing different types of internal income disparity. This study further argues that internal income disparity comprises both the unreasonable internal income disparity caused by executives' rent-seeking and reasonable disparity formed to ensure incentive effects. The involvement of state-owned shareholders in private enterprises can influence internal income disparity through various mechanisms. Considering that the internal income disparity results from the joint movement of executive and employee salaries, this study decomposes the internal income disparity and explores the impact and mechanisms of state-owned shareholders' involvement from the perspectives of executive and employee salaries. To test the above problems, this study takes the data of China's A-share private listed companies from 2007 to 2021 as sample. Among them, data on state-owned shareholders is sourced from the RESSET database and manually collated, while other data comes from the CSMAR database and statistical yearbooks. The study finds that overall, the involvement of state-owned shareholders significantly reduces internal income disparity within private enterprises. Specifically, the involvement of state-owned shareholders reduce the unreasonable internal income disparity of private enterprises and increase their reasonable internal income disparity. Examination of the mechanisms from the aspects of executive and employee salaries reveals that state-owned shareholders' involvement has no significant impact on executive salaries. This is because state-owned shareholders not only reduce the excessive administration expenses, thereby inhibiting executive rent-seeking, but also enhance the incentive effect of executive salaries, reducing stickiness of executive salary. Moreover, state-owned shareholders' involvement promotes the increase of employee salary by improving the employment system of private enterprises, raising deserved salaries, and boosting employee motivation, thereby reducing salary stickiness. Heterogeneity tests show that the role of state-owned shareholders in reducing internal income disparity is more significant when companies have more excessive on-the-job consumption and redundant resources. Through these impacts, state-owned shareholders' involvement achieves the economic outcomes of reducing the administration expense rate and increasing total factor productivity. Contributions of this study are reflected in three main areas: First, in terms of research perspective, it reveals the impact and mechanisms of state-owned shareholders' involvement on internal income disparity within private enterprises under China's mixed ownership reform. It also deepens the understanding of the influencing factors and reasons of internal income disparity. The study finds that state-owned shareholders can effectively reduce internal income disparity, mitigating the income disparity formed by executive rent-seeking while enhancing the incentive role of income disparity. Second, in terms of theoretical innovation, the study deepens the understanding of tournament theory and social equity theory. Previous research showed disputes on how to adjust internal income disparity. By distinguishing internal income disparity based on different formation reasons, this study finds that state-owned shareholders reduce the unreasonable internal income disparity and increase reasonable internal income disparity, promoting the coordinated development of both theories and providing a theoretical basis for the introduction of relevant policies regulating income distribution. Third, in terms of practical significance, the study enhances understanding of the functional positioning of state-owned shareholders, revealing that their involvement in private enterprises can achieve a unity of fairness and efficiency, thus holding significant value for promoting common prosperity and offering new policy insights for strengthening, optimizing and expanding state-owned capital. This study explores the role of state-owned capital in the development of the private economy at the micro level. Future research can expand to the meso and macro levels, examining how state-owned capital guides industrial adjustments and realizes layout optimization.
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