Top-down monitoring and investment efficiency in state-owned enterprises: evidence from a quasi-natural experiment

• CIT visits significantly increase investment efficiency for both under- and over-investing local SOEs. • Effects are stronger in firms with high official interference, weak governance, or high policy uncertainty. • Central monitoring has a more powerful impact on unlisted SOEs compared to publicly listed SOEs. • Inspections lead to sustained improvements in ex-post long-term operating performance (ROA). • Centralized oversight acts as a robust top-down governance mechanism for SOEs in transition economies. Despite their global presence, state-owned enterprises’ (SOEs) corporate governance has received less attention than that of non-SOEs. Using China’s central inspection team (CIT) visits as a quasi-natural experiment, we examine how central government monitoring influences local SOEs’ investment efficiency. These visits may both limit local officials’ interference and curb managers’ pursuit of personal gains and impose excessive external responsibilities on firms. We find that investment efficiency increases after CIT visits, both in underinvesting and overinvesting firms. These effects are stronger in firms facing greater government interference, weaker internal governance or greater policy and economic uncertainty. Moreover, CIT visits affect unlisted SOEs more than listed SOEs, improve ex-post long-term operating performance and remain effective over time (i.e., revisit inspections). Our findings highlight the central government’s role in enhancing local SOEs’ investment practices, as an effective top-down corporate governance mechanism.