Challenges in the Era of Globalization - iaabd

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growth and represented by ��
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The profit hereis the operating profit due to more stable and lasting,
which is the result of the production or other business activities, while the net profit is influenced by
many other uncertainty and uncontrollable factors.
The formula embodies the assumption that an effective internal capital market will continue to invest the
industry where profits keeps growing, while reduce the investment on the industry where profit declines.
In particular, if β greater than zero, it means when the industry profit increase, the investment will be
also increased; and the internal capital market is effective. On the contrary, if the variable is less than � �
0, then this market is an inefficient in resource allocation.
Empirical design for the factors influencing the efficiency of capital allocation
The efficiency of central SOEs’ investment is influenced by problems of asymmetric information and
agency. The problems have two primary levels: one is between the central SOE and their subunits; the
second one is between the central SOE and the central government represented by SASAC of the State
Council. We assume the agency conflicts within the firm can be solved or mitigated by 5 categories of
influencing factors as follows.
One
Firstly, the management motivation could improve the efficiency of internal capital market. We use two
indicators to measure the degree of managers’ motivation. is management equity incentives
denoted by the indicator variables Mshare, which takes on the value 1 if the company has equity incentive
program and 0 if it has not. Management compensation, represented by indicator variables Mincome,
which is the top3 executive's compensation. Since the large range values of this variable, the empirical
study would take the natural logarithm. � �
Secondly, the internal governance generally affects the efficiency of capital allocation. The companies
with better corporate governance have more efficient internal capital markets and so higher corporate
value. Since the board of directors is seemed as the essence of corporate governance, we selected two
indicators reflecting the board structure as our measures. One is the proportion of independent directors
(IDR). The other is whether the chairman and general manager is the same person (CM), which takes the
value of 1 if it is not the same person, and 0 if it is.
The third factor category is the external governance, such as creditors’ supervision and government
regulations etc. We investigate the function of external governance by one indictor regarding creditors,
denoted by asset-liability ratio (Total liabilities / total assets). We assume with the increase of assetliability
ratio, the creditors (banks or other institutions) will enhance the supervision on the enterprises’
operation and investment for their own financial safety.
Next, the capital structure of central SOEs may have notable effect on the efficiency in capital allocation
during Chinese transition and SOEs’ reform. Two measures are used to reflect the capital structure.
�Separation of control right and cash flow right (Sep) Share proportion of the largest shareholder or
controlling shareholder (LSshare). These two indicators reflect the agency problem between controlling
shareholder and minority shareholders. The controlling shareholders’ interest exploitation from minority
shareholders is due to the conflicts between cash-flow rights and voting rights. �
The final type of factor is the unique characteristics of the central SOEs, such as total assets, market
value, net assets, etc. Those indicators show the features of central SOE, which is the condition and
environment of ICM and hence affect the efficiency of ICM. We choose book value of asset to present
β
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