Xi crackdown curbed SOE managers’ luxury habit but gain in value remains elusive
Eight-Point Regulation visibly reduced conspicuous consumption but shareholder value did not show a corresponding increase
Corruption is perceived to be widespread in China. Transparency International’s most recent Corruptions Perceptions Index ranked China at 83rd out of 167 countries. In contrast, Singapore was more transparent at eighth place and Hong Kong at 18th.
Corruption has been shown to be associated with slower economic growth. Despite earlier leaders’ efforts in tackling China’s corruption, no significant consequences have been achieved. Not yet at least, until President Xi Jinping came into power in 2012 with the Eight-Point Regulation regarding government officials’ work behaviour which includes curbing excesses. A highly visible sign of its impact is the ban on consuming luxury goods and services by government officials and state-owned enterprise (SOE) executives who are also quasi-government officials.
At the National University of Singapore Business School, I assessed the impact of Xi’s anti-corruption campaign by studying publicly listed Chinese firms’ stock market reactions to the announcements of the events associated with the Eight-Point Regulation as well as the excessive perk consumption and accounting performance before and after the campaign.
The study covered all publicly traded Chinese firms on the two domestic stock exchanges over the period 2011 to 2014, two years before and two years after the announcement of the Eight-Point Regulation. In particular, the impact of Xi’s anti-corruption campaign on the stock price and profits of firms selling luxury goods and services and firms consuming them were assessed. By and large, the conclusions were similar for stock price and profits.
Xi’s anti-corruption campaign appears to have had a significant impact on the sale of luxury goods and services. Compared with non-luxury selling firms, companies selling luxury products experienced an 11.9 percentage point drop in abnormal stock returns upon the announcements of events associated with the Eight-Point Regulation, and a 7.3 percentage-point decline in return on assets in the first two years after the launch of the anti-corruption campaign.
The financial impact of the campaign on firms selling luxury goods and services is visible and significant but did the campaign achieve a change in the behaviour of luxury consuming staff on SOEs and non-SOEs?
Top management of Chinese SOEs, especially those in regulated industries, are known to enjoy excessive perks. Weak monitoring resulting from the nature of government ownership meant these executives have both the ability and opportunity to undertake bribes for personal gain, bribes that invariably include luxury goods and services.
SOEs in regulated industries were found to significantly reduce their excessive perk consumption in the post period 2013 to 2014 relative to SOEs in competitive industries. On average, the campaign has reduced some 28.6 million yuan (HK$32 million) of excessive perk consumption, based on the reduction in return on assets arising from the anti-corruption campaign.
However, for non-SOEs in regulated industries, there is no corresponding reduction in excessive perk consumption. This finding may not be surprising because these firms, being privately held, are less likely to suffer from the problem of excessive perk consumption. Management of non-SOEs are more mindful of excesses.
One would expect that with this curb on conspicuous consumption, net shareholder value of SOEs consuming luxury products will improve. Surprisingly, it does not.
There are a few possible reasons for this. First, due to the loss of excessive perk consumption, many Chinese SOE executives may have become unhappy and potentially lost the motivation to work hard.
Second, it is possible that Xi’s anti-corruption campaign may have failed to reduce SOE executives’ bribe-taking behaviour because of the opacity and varieties of bribery activities. For instance, instead of providing SOE executives with luxury products directly, bribers can offer cash instead. Further, a significant loss of the SOE executives’ visible perk consumption may well give them incentives them to pursue less visible perk consumption.
Third, because it is not apparent what constitutes normal business expenses, it is possible that risk-averse SOE executives may have cut more than is called for, including many normal employee fringe benefits and necessary business entertainment expenses. Such cuts may have reduced employee morale and productivity, and undermined firm performance.
Despite the visible negative impact of China’s anti-corruption campaign on firms selling luxury products, our results suggest that there is still a long way to go before China can claim victory in the anti-corruption campaign. Further structural reforms may be necessary to change managerial incentives, root out corruption and improve firm performance of publicly listed Chinese firms.
Ke Bin is provost’s chair and professor of accounting at National University of Singapore (NUS) Business School