Does External Monitoring Improve the Performance of State-Owned Enterprises?

Abstract: This paper investigates how external monitoring from government influences the performance of state-owned enterprises (SOEs), by affecting managerial expropriation in procurement (proxied by input prices) and shirking in production management (proxied by productivity). We estimate input prices and productivity separately using a structural approach. Empirical application demonstrates strong causal evidence that enhancing monitoring, as an important component of corporate governance, can substantially improve SOEs’ input prices and productivity, and higher monitoring costs have negative effects. The negative cost effects are largely alleviated by a monitoring-strengthening policy. The results suggest government monitoring is an effective policy instrument to improve SOE performance.