Can the Participation of Party Organizations in the Corporate
Governance of Chinese State-Owned Enterprises Restrain Inefficient
Investment? An Empirical Study Based on a Time-Varying DID Model
Yue Cao
a
College of Business and Tourism, Sichuan Agricultural University, Chengdu, 611800, China
Keywords: Party Organization, Corporate Governance, State-Owned Enterprise, Inefficient Investment, Time-Varying
Difference-In-Differences Model.
Abstract: This paper uses A-share state-owned listed enterprises as the research object from 2010 to 2020 and
develops a time-varying difference-in-differences (time-varying DID) model to test the relationship between
party organization participation in state-owned enterprise (SOE) corporate governance and inefficient
investment. The results show that party organization participation in SOE corporate governance
significantly inhibits inefficient investment behavior. A further analysis based on SOE heterogeneity reveals
that the inhibitory effect of party organization participation in corporate governance on inefficient
investment is more pronounced in commercial SOEs and local SOEs. The policy effect of party organization
participation in corporate governance is mainly achieved by reducing agency costs by increasing total asset
turnover, thus discouraging inefficient investment. This paper provides important policy implications for
China to further promote the participation of party organizations in the corporate governance of SOEs.
a
https://orcid.org/0000-0003-2080-8122
1 INTRODUCTION
According to the report of the 19th Party Congress,
"China's economy has shifted from a stage of
high-speed growth to a stage of high-quality
development." The digital economy assists the
country's economy in developing with high quality,
and SOE play a leading role in the high-quality
development of the digital economy, with the Party's
participation in SOEs' corporate governance being
an important pillar of their digital construction. The
modern SOE system with Chinese characteristics,
according to General Secretary Xi Jinping, is
"special" in that the Party's leadership is integrated
into all aspects of corporate governance, and the
Party organization is embedded in the corporate
governance structure. The Party organization's role
in SOEs corporate governance grows as it becomes
more embedded, so its role path and governance
effects are worth further investigation, with the
inhibiting effect on inefficient investment being a
key aspect of the Party organization's participation
in SOEs corporate governance.
In recent years, empirical studies have confirmed
the effects of party organization participation in
SOEs corporate governance, and the findings show
that party organization participation in SOE
governance helps to enhance corporate information
transparency (Mao and Wei 2020), restrain the
problem of "insider control" (Ma et al 2012), reduce
bond credit risk (Tong et al 2021), curb corporate
surplus management behavior (Cheng et al 2020),
tax avoidance (Li et al 2020), and financial fraud
(Cheng and Zhang 2022), and help to improve
corporate performance (Cui 2021). Then, this paper
is concerned with whether the participation of party
organizations in SOEs corporate governance can
prevent inefficient investment behaviors. How do
the dynamics of inefficient investment change
before and after party organizations participate in
SOEs corporate governance? Is its inhibitory effect
on inefficient investment affected by the
heterogeneity of SOEs?
538
Cao, Y.
Can the Participation of Party Organizations in the Corporate Governance of Chinese State-Owned Enterprises Restrain Inefficient Investment? An Empirical Study Based on a Time-Varying
DID Model.
DOI: 10.5220/0011751600003607
In Proceedings of the 1st International Conference on Public Management, Digital Economy and Internet Technology (ICPDI 2022), pages 538-544
ISBN: 978-989-758-620-0
Copyright
c
 2023 by SCITEPRESS – Science and Technology Publications, Lda. Under CC license (CC BY-NC-ND 4.0)

2 RESEARCH HYPOTHESIS
Compared with private enterprises, SOEs can easily
alleviate financing constraints by obtaining financial
subsidies and credit support under the government's
"implicit guarantee" (Zhu et al 2015), so the main
reason for inefficient investment in SOEs is the
principal-agent problem, which is primarily
reflected in the following two aspects: First, the
principal-agent problem between shareholders and
management. The managers of SOEs may make
excessive investments that are contrary to the
long-term development of the enterprise due to the
tendency of "empire building" (Liu et al 2012) or to
gain political promotion (Xu 2019); they may also
under-invest due to their motives of risk avoidance,
laziness, and enjoyment of peace and stability (Li
2011). Following the party organization's
participation in the corporate governance of SOEs,
the executives of SOEs become members of the
party organization through the leadership
mechanism of "two-way entry and
cross-appointment" and tend to exercise
administrative supervision on behalf of the party and
the government as "stewards" (Ma 2013), thereby
helping to restrain their self-interest pursuing
behavior. Second, there is the issue of agency
between major shareholders and small and medium
shareholders. When large state shareholders interfere
with SOEs investment behavior for political, social,
and economic development purposes, party
organizations must coordinate and protect the
legitimate rights and interests of stakeholders such
as small and medium shareholders, employees, and
creditors of the company (Chen 2018). In summary,
the first research hypothesis is proposed in this
paper.
Hypothesis H1. Participation of party
organizations in SOEs corporate governance
discourages inefficient investment.
The general public welfare SOEs frequently
make investment decisions to protect people's
livelihoods, and it may be difficult for the party
organization to participate in their corporate
governance to suppress the resulting inefficient
investment behavior. Whereas commercial SOEs
operate commercially according to marketization
requirements, and their investment decisions are
more for market competition, and the party
organization's supervisory and check-and-balance
role helps to reduce inefficient investments caused
by executives' self-interest motives. As a result, the
second research hypothesis is proposed in this paper.
Hypothesis H2. When compared to public
welfare SOEs, participation of party organizations in
commercial SOEs corporate governance has a
greater inhibiting effect on inefficient investment.
Central SOEs tend to make investment decisions
to promote national economic development in mind,
and it may be difficult for party organizations to
influence their investment decisions. Whereas local
SOEs are subject to local government intervention,
and their executives may engage in unreasonable
investment behaviors that cater to local government
performance needs for political promotion, and the
deterrent effect of party organizations helps to
inhibit such behaviors. As a result, the third research
hypothesis is proposed in this paper.
Hypothesis H3: When compared to central
SOEs, participation of party organizations in local
SOEs corporate governance has a greater inhibiting
effect on inefficient investment.
3 METHODOLOGY AND DATA
3.1 Sample Selection
The research object in this paper is A-share
state-owned listed companies from 2010 to 2020,
and the raw data are processed as follows by
existing research practice. (i) exclude samples from
the financial industry; (ii) exclude samples with the
years ST, *ST, and PT; (iii) exclude samples with a
listing time of less than one year; (iv) exclude
samples with an asset-liability ratio greater than or
equal to 1 or less than or equal to 0; and (v) exclude
samples with missing data for the main variables.
Finally, 9757 annual company observations from
1194 different companies were obtained.
Meanwhile, the continuous variables at the firm
level were subjected to a 1% winsorize to eliminate
the influence of extreme values. The personal
characteristics documents of directors and
supervisors provided by the CSMAR database and
annual reports of companies were used to construct
indicators related to party organizations'
participation in corporate governance of SOEs, and
all other financial data was obtained from the
CSMAR database. Excel 2010 and Stata 16.0 were
used to process the data in this work.
Can the Participation of Party Organizations in the Corporate Governance of Chinese State-Owned Enterprises Restrain Inefficient
Investment? An Empirical Study Based on a Time-Varying DID Model
539

3.2 Time-Varying DID Model
The most commonly used measure in estimating
treatment effects is DID model. In contrast to the
traditional DID model, which implements the policy
at a single point in time, time-varying DID model is
applicable to the progressive implementation of the
same policy in the impact group.
Given that party organizations are not involved
in the corporate governance of each SOE at the same
point in time during the sample selection period, this
paper develops a time-varying DID model for
testing to investigate whether party organization
participation in the corporate governance of SOEs
can suppress inefficient investment.
𝐼𝑛𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
,
= 𝛼

+ 𝛼

𝑝𝑜𝑠𝑡_𝑝𝑎𝑟𝑡𝑦
,
+ 𝛾𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠+ 𝜀
,
(1)
3.3 Variables and Data Description
Explained variables: This paper draws on
Richardson's (2006) investment efficiency model,
and the absolute value of the residuals in the model
is used to measure inefficient investment, with a
higher value indicating a more serious degree of
inefficient investment by the firm. The following is
the investment efficiency model that was used in this
paper.
𝐼𝑛𝑣𝑒𝑠𝑡
,
= 𝛽

+ 𝛽

𝑆𝑖𝑧𝑒
,
+ 𝛽

𝐿𝑒𝑣𝑒𝑙
,
+ 𝛽

𝐴𝑔𝑒
,
+𝛽

𝐺𝑟𝑜𝑤𝑡ℎ
,
+ 𝛽

𝑅𝑒𝑡𝑒𝑟𝑛
,
+ 𝛽

𝐶𝑎𝑠ℎ
,
+ 𝛽

𝐼𝑛𝑣𝑒𝑠𝑡
,
+ 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦
+ 𝑌𝑒𝑎𝑟+ 𝜀
(2)
Explanatory variables: In this paper, referring to
existing studies (Tong et al 2021; Cheng et al 2020;
Xie et al 2019), the members of enterprise party
organizations serve on the board of directors,
supervisory board, and managerial level are taken as
the measure of party organization participation in
corporate governance of SOEs, and due to the
inconsistent time points of party organization
participation in corporate governance of SOEs, the
dummy variable post_party is set, and the annual
interval after party organization participation in
corporate governance is assigned as 1, otherwise 0.
Its coefficient is the net policy effect of the
time-varying DID model.
Control variables: Size, Level, Growth, First,
Lnpay, Period, and Fcf were chosen as control
variables in this paper based on the design of
previous studies (Xie et al 2019).
The variable definitions and descriptive statistics
results are shown in Table 1.
Table 1: Descriptive statistics of all variables.
Variables Description Mean StDev Min Max
Inefficient
The absolute value of the residuals in model (2).
0.0364 0.0422 0.000387 0.250
post_party
The annual interval after the participation of party organizations in
corporate governance of SOEs is assigned a value of 1, otherwise, it is 0.
0.775 0.417 0 1
Size
Natural logarithm of total assets at the end of the period. 22.82 1.401 20.14 26.94
Level Gearing ratio. 0.509 0.198 0.0853 0.909
Growth
Operating income growth rate. 0.127 0.343 -0.522 2.089
First
Number of shares held by the largest shareholder/total share capital. 38.90 15.16 11.49 76.13
Lnpay
Natural logarithm of the total compensation of the top three executives. 14.38 0.685 12.67 16.29
Period
Retained earnings/total assets at end of period. 0.152 0.165 -0.499 0.579
Fcf Net cash flow from operating activities per share. 0.554 1.009 -2.563 4.578
ICPDI 2022 - International Conference on Public Management, Digital Economy and Internet Technology
540

4 RESULTS AND ROBUSTNESS
TEST
4.1 Main Results
The basic regression results from the time-varying
DID model are shown in Table 2. Column (1)
demonstrates that, in the absence of control
variables, participation of party organizations in
SOEs corporate governance significantly reduces
inefficient investment (coefficient of -0.005, which
is statistically significant). Column (2) demonstrates
that the results remain robust after the inclusion of
control variables, and the regression coefficient is
negative at the 1% significance level, indicating that
the level of inefficient investment in SOEs where the
party organization is involved in corporate
governance decreases by 0.3 percent when
compared to SOEs where the party organization is
not involved in corporate governance, and the
inhibitory effect of the party organization is
significant. Thus, hypothesis H1 is confirmed.
Because the potential inhibitory effects of party
organization participation in corporate governance
of different types of SOEs on inefficient investment
differ, this paper runs grouped regressions based on
the basic regression results according to the
functional positioning and management level of
SOEs.
The regression coefficient of post_party in
column (3) of Table 2 is not significant, most likely
because the investment decisions of public welfare
SOEs are centered on safeguarding people's
livelihood and serving society, and it is difficult for
the party organization to influence the resulting
inefficient investment phenomenon. Whereas the
regression coefficient of post_party in column (4) is
negative and significant at the 5% level, indicating
that in commercial SOEs, the party organization
effectively suppresses the inefficient investment
phenomenon. As a result, hypothesis H2 is
confirmed.
The regression coefficient of post_party in Table
2 column (5) is not significant, most likely because
central SOEs cover major industries related to
national security and the lifeline of the national
economy, and it is difficult for the party organization
to play a decisive role in major investment decisions
after participating in the corporate governance of
central SOEs. Whereas the regression coefficient of
post_party in column (6) is -0.004 and significant at
the 1% level, indicating that the party organization
participation in corporate governance of local SOEs
plays a significant inhibitory role in inefficient
investment. As a result, hypothesis H3 is confirmed.
4.2 Robustness Test
4.2.1 Parallel-Trend Test
The parallel trend test was used in this study five
years before and five years after party organizations
participated in corporate governance, and the results
are shown in Figure 1. The development trend
between the experimental group and the control
group is basically the same before the participation
of party organizations in corporate governance of
SOEs, and there is no significant difference, so it
satisfies the parallel trend test. However, after the
participation of party organizations in corporate
governance of SOEs, there is a significant difference
between the control group and the experimental
Table 2: The estimation results in the time-varying DID model.
Variables (1) (2) (3) (4) (5) (6)
post_party -0.005*** -0.003*** -0.002 -0.003** -0.002 -0.004***
(-4.39) (-2.71) (-0.47) (-2.50) (-1.08) (-2.58)
Constant 0.041*** 0.087*** 0.081** 0.086*** 0.087*** 0.087***
(39.84) (7.92) (2.29) (7.35) (4.33) (6.02)
Controls NO YES YES YES YES YES
Year YES YES YES YES YES YES
Industry YES YES YES YES YES YES
Observations 9,757 9,757 1,470 8,287 3,269 6,488
R-squared 0.116 0.163 0.134 0.181 0.239 0.162
r2_a 0.109 0.149 0.0717 0.166 0.204 0.141
F 19.23 7.178 1.378 7.062 4.576 4.718
Note: The t-values in parentheses, *, **,***, denote significance at the 10%, 5%, and 1% levels, respectively.
Can the Participation of Party Organizations in the Corporate Governance of Chinese State-Owned Enterprises Restrain Inefficient
Investment? An Empirical Study Based on a Time-Varying DID Model
541

Figure 1: The results of parallel-trend test.
Figure 2: The results of placebo test.
group, and the coefficient of inefficient investment
is significantly higher. As a result, the parallel trend
test was passed by the time-varying DID model built
in this paper.
4.2.2 Placebo Test
To further eliminate the endogeneity effect, the
following steps were taken in this study: To begin,
the same number of firms (1000) as in the previous
experimental group was chosen at random from the
sample to create a pseudo-experimental group.
Second, a pseudo-policy time dummy variable is
created by randomly selecting one year between
2010 and 2020. Finally, interaction terms for
regression were created, and the above test
procedure was repeated 500 times. The placebo test
results are shown in Figure 2. As shown in Figure 2,
the regression coefficients obtained from 500
repeated round-robin tests are concentrated around
0, and the majority of p-values are greater than 0.1.
The placebo test results show that the reduction in
the degree of inefficient investment in SOEs is due
to the party organization governance effect, not time
trends or other random factors, demonstrating the
validity of the time-varying DID model established
in this research.
5 INFLUENCE MECHANISM
The following model is developed in this paper
using the three-step method of mediating effects to
further test whether there is a mediating effect of
agency costs on the effect between the participation
of party organizations in corporate governance of
SOEs and inefficient investment.
ICPDI 2022 - International Conference on Public Management, Digital Economy and Internet Technology
542

𝑇𝑡𝑐
,
= 𝑏

+ 𝑏

𝑝𝑜𝑠𝑡_𝑝𝑎𝑟𝑡𝑦
,
+ 𝛾𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠
+ 𝜀
,
(3)
𝐼𝑛𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
,
= 𝑐

+ 𝑐

𝑝𝑜𝑠𝑡_𝑝𝑎𝑟𝑡𝑦
,
+ 𝑐

𝑇𝑡𝑐
,
+ 𝛾𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠
+ 𝜀
,
(4)
The total asset turnover ratio is used to measure
the firm's agency cost in this paper, drawing on Luo
(2014). Because asset turnover ratios are less
volatile and difficult to manipulate. A higher asset
turnover ratio indicates that the firm's agency cost is
lower. The post_party regression coefficient in
column (1) of Table 3 is 0.046 and significant at the
1% level, indicating that party organization
participation in SOEs corporate governance
significantly increases the total asset turnover rate.
In column (2), the regression coefficient of Ttc is
-0.009 and significant at the 1% level, indicating
that party organization participation in SOEs
corporate governance can suppress inefficient
investment by increasing total asset turnover to
reduce agency costs, confirming the mediating effect
of total asset turnover.
Table 3: The results for the influence mechanisms.
Variables (1) (2)
Ttc Inefficient
post_party 0.046*** -0.003**
(4.06) (-2.36)
Ttc -0.009***
(-8.59)
Constant -0.232** 0.085***
(-2.25) (7.75)
Controls YES YES
Year YES YES
Industry YES YES
Observations 9,757 9,757
R-squared 0.427 0.170
Year YES YES
Industry YES YES
r2_a 0.418 0.156
F 12.00 8.076
6 CONCLUSION
This paper investigates the relationship between
party organization participation in SOEs corporate
governance and inefficient investment by
developing a time-varying DID model with A-share
listed SOEs as the research sample from 2010 to
2020, and the empirical results show that party
organization participation in SOEs corporate
governance significantly inhibits inefficient
investment behavior. Based on the heterogeneity of
SOEs, it is discovered that the inhibitory effect of
party organization participation in corporate
governance on inefficient investment exists in
commercial SOEs and local SOEs than in public
welfare SOEs and central SOEs. In terms of its
influence mechanism, participation in corporate
governance by party organizations reduces agency
costs by increasing total asset turnover, thereby
inhibiting inefficient investment.
This paper provides important policy
implications for China to further promote the
participation of party organizations in the corporate
governance of SOEs as follows: First, a large part of
the inefficient investment phenomenon in SOEs is
due to executives' self-interest motives. As a result,
the Party should fully exercise the role of
supervision and checks and balances, as well as the
role of "direction" in SOE investment decisions and
other major decisions to maintain the integrity of
state-owned assets. Second, the state should fully
understand the positive role of party organizations,
improve the path and methods of party
organizations' participation in SOEs corporate
governance, bring the superiority of the modern
SOE system with Chinese characteristics into play,
and accelerate SOEs digitalization, to improve the
development of the national digital economy and
stabilize the high-quality development of the
national economy.
Furthermore, because whether or not party
organizations are involved in corporate governance
is not required information for state-owned listed
companies to disclose, the involvement of party
organizations in corporate governance of
state-owned enterprises derived from the CSMAR
database of individual characteristics documents of
directors, supervisors, and executives in this paper
may differ from the actual situation. As a result,
under the modern SOE system with Chinese
characteristics, the relevant authorities should make
it mandatory for listed SOEs to disclose their
participation in corporate governance by party
organizations. Future research should develop a
model that accurately measures party organization
participation in governance based on the disclosed
data in order to empirically test the effectiveness of
party organization governance and analyze the
economic phenomena associated with it using
econometric models.
Can the Participation of Party Organizations in the Corporate Governance of Chinese State-Owned Enterprises Restrain Inefficient
Investment? An Empirical Study Based on a Time-Varying DID Model
543

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