There’s an ongoing debate in the academic literature as to whether government control of a company is a good or bad thing [Yes, really].
It’s a topical question as investors in government connected Chinese property companies are probably having a better time of it than those in wholly private entities. Investors in China tech stocks would probably also welcome a little more love from the government, which greater ownership would provide, than they’ve received over the last 24-months.
The paper today though zeros in a very specific aspect of government ownership, whether or not government owned entities in China are good stewards of cash?
Xinyu Yu and Ping Wang of the universities of Surrey (UK) and Birmingham (Ditto) have looked at 2,430 listed companies over the period 2003 to 2015 and conclude, via valuation analysis, they are not.
Investors are often asked to take a look at companies with a lot of cash with the presumption these are perhaps ‘safer’ than those more balance sheet constrained. The safety argument may have some merit but the benefit stops there.
The researchers discover that Chinese state-owned companies with high cash balances are systematically undervalued (relative to their cash). The why of this seems to be a function of what they end up doing with their cash i.e. investing in projects with often poor returns for political reasons.
There’s not much more to see here. Consider yourself warned.
You can access the work in full via the following link Government Control and the Value of Cash
Happy Sunday.