Mingming Zhou: How do state and family ownership affect internal capital markets? Evidence from Chinese business groups

 

Authors: Donghua Chen, Dequan Jiang, Alexander Ljungqvist, Haitian Lu, Mingming Zhou

Abstract: State and private families are the two prevalent ultimate controllers of publicly traded companies in the world. This article studies how state and family owners allocate resources in their internal capital markets using a unique hand-collected dataset of 283 Chinese business groups each controlling two or more listed companies. Based on connected party transactions, we find internal fund flows from low q to high q member firms in family-owned business groups (FBG), but from high q to low q member firms in state-owned business groups (SBG). We also find that higher minority private ownership in member firms of SBG increases internal capital allocations-to-q sensitivity, while minority government ownership plays the opposite role in FBG member firms. Consistent with the lobbying hypothesis, we find that among SBG, the least efficient internal capital markets are those (i) whose parent company CEO is below the age of 60, (ii) whose parent and subsidiary firms have the same chairman of the board, and (iii) whose parent and subsidiary firms’ registered offices are geographically proximate. Finally we find q-related intra-group resource allocation is correlated with member firms’ long-term investment, suggesting efficient internal capital market contributes to the long-term value creation of the group.