The fault-tolerant and error-correction mechanism and capital allocation efficiency of state-owned Enterprises in China

• Published in: Pacific-Basin finance journal Vol. 80; p. 102075
• Main Authors: Li, Quan, Sun, Haodan, Tao, Yunqing, Ye, Yongwei, Zhan, Kaiyan
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.09.2023
• Subjects: Capital allocation efficiency; Fault-tolerant and error-correction mechanism; Internal governance; Risk-taking; Fault-tolerant and error-correction mechanism; D21; Capital allocation efficiency; Internal governance; C34; G34; Risk-taking
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2023.102075

This study investigates the effect of a fault-tolerant and error-correction mechanism (FTECM) on state-owned enterprises' (SOEs') capital-allocation efficiency (CAE). We conduct difference-in-differences estimations and find that the implementation of this policy significantly improves SOEs' CAE, which remains robust to a series of tests. A mechanism analysis shows that the FTECM can increase executives' willingness to take risks and improve internal governance. A heterogeneity analysis shows that our results are more pronounced in SOEs whose executives have lower risk preferences, weaker internal governance, and less external supervision. We also find that the FTECM improves SOEs' performance. Overall, this study enriches the research on the driving factors in SOEs' CAE and provides a micro-level evaluation of the economic consequences of the FTECM. •We investigate the effect of the fault-tolerant and error-correction mechanism on SOEs' capital allocation efficiency.•We find that this policy significantly improves SOEs' capital allocation efficiency.•The mechanism analysis shows that this policy can increase executives' willingness to take risks and improve internal governance.•Our results are more pronounced in SOEs whose executives have lower risk preference, weaker internal governance and less external supervision.•The fault-tolerant and error-correction mechanism improves the performance of SOEs.