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What Gets Measured Gets Managed: Investment and the Cost of Capital

The authors study the impact of government-led incentive systems by examining a staggered reform in the Chinese state-owned enterprise (SOE) performance evaluation policy. To improve capital allocative efficiency, in 2010, regulators switched from using return on equity (ROE) to economic value added (EVA) when evaluating SOE performance. This EVA policy adopts a one-size-fits-all approach by stipulating a fixed cost of capital for virtually all SOEs, ignoring the potential heterogeneity of firm-specific costs of capital. The authors show that SOEs did respond to the performance evaluation reform by altering their investment decisions, more so when the actual borrowing rate was further away from the stipulated cost of capital. The authors paper provides causal evidence that incentive schemes affect real investment and sheds new light on challenges faced by economic reforms in China.

17
Mar
2022
Thursday

Session Chair: Michael SONG
Professor, Department of Economics, Chinese University of Hong Kong and Senior Fellow, ABFER

10:00 am
What Gets Measured Gets Managed: Investment and the Cost of Capital

Zhiguo HE, Fuji Bank and Heller Professor of Finance and Jeuck Faculty Fellow, Booth School of Business, University of Chicago and Senior Fellow, ABFER

Co-authors:
Guanmin LIAO, Professor, School of Business, Renmin University of China
Baolian WANG, Assistant Professor of Finance, University of Florida
10:25 am
Discussion
Discussant:
Kjetil STORESLETTEN, Richard and Beverly Fink Professor of Economics, Department of Economics, University of Minnesota
10:50 am
Q&A
11:10 am


Updated 24 Mar 2022

Speakers

  • Zhiguo HE

    Zhiguo HE

     

    Fuji Bank and Heller Professor of Finance and Jeuck Faculty Fellow, Booth School of Business, University of Chicago and Senior Fellow, ABFER

    Zhiguo HE is interested in the implications of agency frictions and debt maturities in financial markets and macroeconomics with a special focus on contract theory and banking. His recent research focuses on the role of financial institutions in the 2007/08 global financial crisis. He is conducting academic research on Chinese financial markets including the stock market, local government debt, shadow banking, and interbank markets together with recent regulation changes. Professor He has also been writing academic articles on new progress in the area of cryptocurrency and blockchains.

    His research has been published in leading academic journals including the American Economic Review, Econometrica, Review of Economic Studies, Journal of Finance, Review of Financial Studies, Journal of Financial Economics, American Economic Journal: Macroeconomics, and Management Science. He has been an associate editor for the Review of Financial Studies and Management Science and currently serves as an associate editor for the Journal of Finance. He serves as the guest editor of the Review of Finance for the “Special Issue on China” in 2020-2021, and will be serving as the Editor for the Review of Asset Pricing Studies starting July 2021.

    Professor He received his bachelor and master degrees from the School of Economics and Management at Tsinghua University before receiving his PhD from the Kellogg School of Management at Northwestern University in 2008. He has been named a 2014 Alfred P. Sloan Research Fellow, and has won numerous awards for his outstanding scholastic record, including the Lehman Brothers Fellowship for Research Excellence in Finance in 2007, the Swiss Finance Institute Outstanding Paper Award in 2012, the Smith-Breeden First Prize in 2012, and the Brattle Group First Prize in 2014. Before joining the Chicago Booth faculty in 2008, he worked as a stock analyst at the China International Capital Corporation in Beijing in 2001 and visited the Bendheim Center for Finance at Princeton University as a post-doctoral fellow.

    In Autumn 2015 Professor He was the Dean’s distinguished visiting scholar at Stanford University, Graduate School of Business, and in winter 2020 he is a visiting professor of finance at Yale University, School of Management. In January 2020, he testified at U.S.-China Economic and Security Review Commission (USCC) Hearing on “China’s Quest for Capital: Motivations, Methods, and Implications.”

  • Kjetil STORESLETTEN

    Kjetil STORESLETTEN

     

    Richard and Beverly Fink Professor of Economics, Department of Economics, University of Minnesota

    Kjetil STORESLETTEN is a Richard and Beverly Fink Professor of Economics at University of Minnesota and a Fellow of Econometric Society. He has previously held positions at University of Oslo, Federal Reserve Bank of Minneapolis, and the Institute for International Economic Studies. Storesletten has been the Managing Editor of the Review of Economic Studies(2006-2010) and Chairman of the same journal (2013-2017). He is currently a co-editor of Quantitative Economics. He has served as a member of the Executive Monetary Policy Committee of Norway (2014-2019) and as President of the European Economic Association.

    Kjetil received his Ph.D. in economics from Carnegie Mellon University in 1995. He is a macro economist and his work has appeared in all top journals in economics, including the Quarterly Journal of Economics, Journal of Political Economy, American Economic Review, and Econometrica. He won the Sun Yefang Award from the Chinese Academy of Social Sciences for the paper “Growing like China”. He has also received an Advanced Grant from the European Research Council (2012-2018).

  • Michael SONG

    Michael SONG

     

    Professor, Department of Economics, Chinese University of Hong Kong and Senior Fellow, ABFER

    Michael Song is a professor at the Department of Economics, Chinese University of Hong Kong (CUHK), an outstanding fellow of the Faculty of Social Science at CUHK, a co-director of CUHK-Tsinghua Joint Research Center for Chinese Economy and a distinguished visiting professor at the School of Economics and Management, Tsinghua University. His research focuses onChinese economy and macroeconomics. He published papers on leading academic journals including American Economic Review and Econometrica. His paper “Growing like China” won Sunyefang Economic Science Award and the Best Paper Award for Chinese Young Economists. Before joining CUHK, Prof. Song was an associate professor of economics at Chicago Booth. Prof. Song is also a co-editor of China Economic Review, an associate editor of Econometrica and Journal of European Economic Association and an academic committee member of China’s Economics Foundation.

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Session Format

Each session lasts for 1 hour 10 minutes (25 minutes for the author, 25 minutes for the discussant and 20 minutes for participants' Q&A). Sessions will be recorded and posted on ABFER's web, except in cases where speakers or discussants request us not to.

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Agenda