Government Intervention, Pyramidal Structure and Investment of Local State-Owned Firms: Empirical Evidence from Chinese Capital Market

With the data of Local State-owned listed firms from 2002 to 2006, this paper examines the effects of government intervention and pyramidal layers on over- or under- overinvestment. The results show that government intervention has induced overinvestment in the local government control firms, and find that corporate overinvestment can be weakened by pyramidal layers. Therefore, in addition to extending growing pyramidal layers literature in emerging capital markets, the conclusions provide the direct evidence of government intervention in economic transition period and an insight into the reform of separation of government and enterprise in China.