The power influence of executives and corporate investment efficiency: empirical evidence from Chinese state-owned enterprises

The study examines how the power influence of executives in Chinese state-owned enterprises (SOEs) affects corporate investment efficiency. Motivated by the quasi-official status of SOE executives and the unique governance and incentive structures in SOEs, the paper frames executives as both “economic man” (subject to agency conflicts and personal utility maximization) and “social man” (motivated by stewardship, promotion, and collective goals). It identifies gaps in prior work, which often measures executive power in a single internal dimension and overlooks external influence and the special institutional context of Chinese SOEs. The research addresses three questions: (1) What constitutes the power influence of SOE executives? (2) How does this power influence affect investment efficiency? (3) Do governance factors moderate this relationship? Competing hypotheses are proposed: H1a that power influence improves investment efficiency (stewardship logic) and H1b that power influence reduces investment efficiency (agency logic). The paper also proposes mediating mechanisms via financing constraints and diversification, and moderating roles for equity concentration and independent director oversight.

Prior studies link executive power to investment efficiency through two lenses. First, principal–agent perspectives suggest power may either improve efficiency or induce inefficiency due to promotion incentives, opportunism, reputation management, or managerial defense. Evidence shows political promotion incentives and equity incentives can drive overinvestment, while reputation/risk concerns may lead to underinvestment. Second, executive characteristics matter: higher managerial ability curbs herding and improves allocation; gender of CEOs influences overinvestment control; political governance and party organization may restrain management power and reduce overinvestment; however, the quasi-official status of SOE executives can increase corruption risk and affect performance. Existing literature often uses single-dimensional internal measures (positions, tenure, board independence, ownership and capital structure) and neglects external influence (industry voice, government access, prestige). This study advances the literature by constructing a multidimensional measure of executive power influence tailored to SOEs’ institutional context and by testing mechanisms through financing constraints and diversification.

Data: Shanghai and Shenzhen A-share state-owned listed companies whose actual controllers are SASACs (all levels), 2010–2018. Exclusions: ST/*ST/PT firms; financial sector; firms with adverse audit opinions; missing data. Continuous variables winsorized at 1% tails. Final sample: 3,654 firm-year observations from 451 SOEs. Data sources: CSMAR and Wind databases; executive positions/awards manually verified via annual reports and online sources. Tools: STATA15. Measurement of executive power influence (Score): Constructed via principal component analysis across four dimensions: organisational position influence, personal competence influence, industry influence, and prestige influence. Secondary indicators include administrative level, CEO duality, tenure length, technical title, political capital, internal promotion, industry association leadership, social influence (awards), and employee advocacy (income superiority). PCA contributions yield composite: Score = 0.351×position + 0.2556×ability + 0.199×industry + 0.1941×reputation. Investment efficiency (Invest): Following Chen et al. (2011) and Chen & Huang (2019), estimate expected investment by regressing net investment expenditures on lagged growth and interactions by year and industry; investment inefficiency is the absolute value of residuals (larger values indicate lower efficiency). Mediators: Diversification (Dyh) measured by HHI across business segments (higher HHI = less diversification). Financing constraints (Fc) measured by the log absolute value of the SA index: SA = -0.737×Size + 0.043×Size^2 - 0.040×Age, where Size is the log of firm size (USD millions) and Age is firm age; larger value indicates greater constraint. Moderators: Equity concentration (Shr) = sum of shareholdings of 2nd to 10th largest shareholders. Independent director oversight (Sid) = number of independent directors/board size. Controls: Leverage (Lev), ROA, cash holdings (Cash), industry and year fixed effects. Models: Two-way fixed effects panel regressions. Main effect: Invest_it = β0 + β1 Score_it + Σ βk Controls_ikt + Year_t + Industry_i + ε_it. Mediation tests: Fc_it = δ0 + δ1 Score_it + ...; Invest_it = λ0 + λ1 Score_it + λ2 Fc_it + ...; Dyh_it = θ0 + θ1 Score_it + ...; Invest_it = φ0 + φ1 Score_it + φ2 Dyh_it + .... Moderation tests: add interaction terms Score×Shr and Score×Sid to main model. Robustness: alternative investment efficiency measure (investment–growth model), lag specifications (Score predicting next-period Invest), and 2SLS IV approach using lagged explanatory variables and industry-year means as instruments.

- Main effect: Greater executive power influence (Score) is associated with lower investment efficiency (higher absolute residuals). Table 7 shows positive and significant coefficients of Score on Invest in most specifications (e.g., 0.017*, t≈1.73), consistent with H1b. - Financing constraints mechanism (H2a): Score is significantly negatively related to financing constraints Fc at the 1% level (Table 8, δ1 < 0), indicating powerful executives reduce financing constraints. Lower Fc is associated with lower investment efficiency (significantly negative coefficient in Invest regression at the 10% level), supporting the pathway: power → fewer constraints → more resources → lower efficiency. - Diversification mechanism (H2b): Score positively relates to diversification intensity (lower diversification measured by HHI implies inverse; text reports a significant positive relation of Score with Dyh), and Dyh is significantly negatively related to investment efficiency, indicating that greater executive power fosters diversification which reduces investment efficiency. - Moderation by equity concentration (H3): The interaction Score×Shr is significantly positive (Table 9), indicating that higher equity concentration mitigates the detrimental impact of executive power on investment efficiency (i.e., governance curbs inefficiency). - Moderation by independent director oversight (H4): The interaction Score×Sid is significantly positive (Table 9), indicating stronger independent director oversight weakens the negative effect of executive power on investment efficiency. - Descriptive statistics (Table 6): Score mean -0.008 (SD 0.470; min -0.742; max 3.838). Invest mean 0.038 (SD 0.035). Fc mean 1.335 (SD 0.075). Dyh mean 0.458 (SD 0.469). Shr mean 0.173. Sid mean 0.373. - Robustness: Findings persist when (i) replacing investment efficiency measure with investment–growth model (power influence linked to overinvestment), (ii) lagging key variables, and (iii) addressing endogeneity via 2SLS with lagged variables and industry-year means as instruments.

Results support the agency-based hypothesis (H1b): in the SOE context, greater executive power influence tends to reduce investment efficiency, suggesting that personal incentives and resource access can drive inefficiencies. The mediating pathways indicate that powerful executives ease financing constraints and then channel abundant resources into diversification, which—beyond an optimal scope—reduces efficiency, consistent with empire-building and soft-budget constraints in SOEs. Governance mechanisms, specifically concentrated ownership and independent directors, moderate this adverse effect, implying that effective monitoring can align executive actions with efficient investment. These findings refine understanding of executive power in SOEs by incorporating external influence dimensions and highlight how institutional features interact with corporate governance to shape investment outcomes.

The study develops a multidimensional measurement of SOE executive power influence and demonstrates empirically that higher executive power is associated with lower investment efficiency in Chinese SOEs. Power reduces financing constraints and promotes diversification, both contributing to inefficiency. Governance—via higher equity concentration and independent director oversight—attenuates these effects. Policy implications include: deepen market-oriented SOE reforms and strengthen executive supervision; abolish administrative ranking systems for SOE executives and move to market-based executive selection; and refocus SOEs on core businesses to avoid inefficient diversification. Future research should expand beyond listed SOEs, adopt additional investment efficiency metrics, and investigate other mediating channels linking executive power to investment outcomes.

- External validity: Findings are based on Chinese A-share listed SOEs and may not generalize to non-listed SOEs or private firms due to different marketization levels and executive selection mechanisms. - Measurement scope: Investment efficiency is primarily assessed using the Chen model; alternative or complementary performance metrics could provide a fuller picture. - Mechanisms: Only financing constraints and diversification are examined; other channels (e.g., internal controls, innovation strategy, CSR pressures) may also mediate the relationship. - Endogeneity: While addressed via lagging and 2SLS with available instruments, residual endogeneity concerns may remain due to limitations in instrument strength or omitted variables.