Summary:
Supply-side structural reform has become the main direction of China's current economic reform, and its primary task is de-capacity. The key to de-capacity is the elimination of zombie firms. Because state-owned enterprises (SOEs) usually incur greater resource misallocation, the proportion of zombie firms is higher among SOEs. Mixed ownership is the main focus of Chinese SOE reform, as studies have found that the introduction of non-state capital improves firm performance through better corporate governance mechanisms and the mitigation of resource misallocation. The question that concerns us here is whether mixed ownership can cure state-owned zombie firms, and if so, which type of mixed ownership is most conducive. This paper deepens the theoretical research on both zombie enterprises and mixed ownership reform for state-owned enterprises, and also improves the theory of resource misallocation from the perspective of mixed ownership, potentially solving the problems of long-term inefficiency among SOEs and the burgeoning of zombie firms in China.We first apply the international cutting-edge method to identify zombie enterprises. To be recognized as a zombie firm in the current year a company must meet the following four conditions: (1) the loan interest rate is lower than the normal market minimum interest rate; (2) earnings before interest and tax are lower than the payable interest in the current year; (3) the liability-asset ratio of the previous year exceeds 50% and the firm continues to borrow in the current year; and (4) the first three criteria have been met for the past two consecutive years.Next, we divide the firms with mixed ownership into three categories according to the proportion of state-owned shares: state-control firms, state-holding firms (firms with state capital but not controlled by the state), and privatized firms (firms with no state capital, a special type of mixed ownership). We then explore whether mixed ownership reform can help to cure zombie firms and which type of mixed ownership reform works best. Using a panel dataset of Chinese industrial enterprises from 1998 to 2013, we obtain some interesting results. First, mixed ownership reform is found to have a significant impact in improving zombie SOEs. Second, the improvement is greater for privatized firms than for state-holding firms, which in turn fare better than state-control firms, forming a “pecking order” for mixed ownership reform. Third, the higher the monopoly and administrative level of SOEs, the weaker the effect of mixed ownership reform in curing zombie SOEs. Finally, we find that the main channel through which mixed ownership reform cures zombie firms is a reduction in the SOE's periodic expenses, such as management expenses. Due to the limitations of the data, this research may suffer from endogenous problems such as omitted variables through overlooking factors that affect the improvement of zombie firms and the mixed ownership reform strategy. This paper examines possible endogeneity issues. This paper makes three contributions to the literature. First, it enriches the research on zombie companies. Zombie firms can lead to resource misallocation and reduce economic efficiency, and thus are an important issue for both policymakers and scholars. Whereas the existing literature examines the causes or influences of zombie firms, this paper analyzes several strategies for treating zombie enterprises, points the way for their elimination, and provides a theoretical basis for further research on how to deal with zombie enterprises. Second, this paper develops the literature on SOE reform by indicating that mixed ownership can improve the efficiency of SOEs and, to an extent, cure zombie SOEs. Moreover, using a variety of mixed ownership types, this paper specifically reveals a “pecking order” in the reform of state-owned enterprises. Third, this paper extends the resource misallocation theory from the perspective of mixed ownership reform, finding that mixed ownership reform can cure zombie state-owned enterprises to an extent, thus reducing resource misallocation. Following this line of thought, we can further expand the research by exploring the actual contribution and channels of mixed ownership reform in improving resource misallocation.
Bai, Chong-en, Jiangyong Lu, and Zhigang Tao. 2009. “How does Privatization Work in China” Journal of Comparative Economics, 37(3): 453～470.
[36]
Brandt, Loren, Johannes Biesebroeck, and Yifan Zhang. 2012. “Creative Accounting or Creative Destruction？ Firm-level Productivity Growth in Chinese Manufacturing” Journal of Development Economics, 97(3): 339～351.
[37]
Caballero, R. J., T. Hoshi, and A. K. Kashyap. 2008. “Zombie Lending and Depressed Restructuring in Japan” American Economic Review, 98(5): 1943～1977.
[38]
Cai, H., and Q. Liu. 2009. “Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms” Economic Journal, 119(537): 764～795.
[39]
Cantoni, Davide, Yuyu Chen, David Y. Yang, Noam Yuchtman, and Y. Jane Zhang. 2017. “Curriculum and Ideology”Journal of Political Economy, 125: 338～39.
[40]
Estrin, Saul, Jan Hanousek, Evzˇen Kocˇenda, and Jan Svejnar. 2009. “The Effects of Privatization and Ownership in Transition Economies” Journal of Economic Literature, 47(3): 699～728.
[41]
Fukuda, S., and Nakamura, J., 2011. “Did ‘Zombie' Firms Recover in Japan？” World Economy, 34(7): 1124～1137.
[42]
Hsieh, Chang-Tai, and Peter J. Klenow. 2009. “Misallocation and Manufacturing TFP in China and India” Quarterly Journal of Economics, 124(4): 1403～1448.
[43]
Hsieh,C., and Z. Song. 2015. “Grasp the Large, Let go of the Small: The Transformation of the Stata Sector in China” Brookings Papers on Economic Activity, 1: 295～366.
[44]
Jensen, Michael C., and William H. Meckling. 1976. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” Journal of Financial Economics, 3(4): 305～360.
[45]
Kane, Edward. 1987. “Dangers of Capital Forbearance: The Case of the FSLIC and Zombie S&Ls” Contemporary Economic Policy, 5(1): 77～83.
[46]
Liao, Guanmin, Xin Chen, Xin Jing, and Jianfei Sun. 2009. “Policy Burdens, Firm Performance, and Management Turnover” China Economic Review, 20(1):15～28.
[47]
Lin, Justin Yifu, and Guofu Tan. 1999. “Policy Burdens, Accountability, and the Soft Budget Constraint” American Economic Review, 89(2): 426～431.
[48]
Wei, Zuobao, Feixue Xie, and Shaorong Zhang. 2005. “Ownership Structure and Firm Value in China's Privatized Firms: 1991-2001” Journal of Financial and Quantitative Analysis, 40(1): 87～108.
