Governments' fiscal stress and firm decentralization

We examine whether and how fiscal stress on local governments affects the decentralization of state-owned enterprises (SOEs). By employing a fiscal shock entailing an average revenue decline of 13.5% across local governments in China, we undertake difference-in-differences design to discern the effect of fiscal pressures on the decentralization of SOEs. Our findings reveal that fiscal stresses of local governments curb SOEs' decentralization. In the context of evaluating the delicate trade-off between control costs and claim rights, against the intrinsic value of localized information, local governments, particularly during challenging fiscal periods, tend to exhibit a tendency towards centralizing SOEs. Furthermore, local governments are more likely to centralize SOEs with greater tax contribution, higher productivity, and better performance in hard fiscal times, while the effects of fiscal stress on the inhibition of SOEs' decentralization are weakened by greater geographical distance to oversight government and weak government intervention.