Does External Monitoring from Government Improve the Performance of State-Owned Enterprises?

Abstract

This paper investigates the impact of external monitoring from government on SOE performance, using variation in monitoring strength arising from a nationwide policy change and firms’ geographic location in China. We utilize a structural approach to estimate input prices and productivity separately at the firm level using commonly available production data. We show that enhanced external monitoring, as a key component of corporate governance, can substantially reduce managerial expropriation in procurement (proxied by input prices) and shirking in production management (proxied by productivity). The results suggest that government monitoring can be an effective policy instrument to improve SOE performance.