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?