CAUSES OF THE SOFT BUDGET CONSTRAINT - EVIDENCE ON 3 EXPLANATIONS

This paper conducts empirical evaluations of three recent theories of the soft budget constraint (SBC) using data from China's enterprise re form period. For enterprises with financial losses, we find that emplo yment of nonproduction workers, investment with below-average rate of return, and distribution of excessive amounts of bonuses have all cont ributed significantly to the losses. In addition, there is no evidence that these factors decrease in response to financial losses. These fi ndings support all three theories identifying political influence, cre ditor's lack of information and commitment. and insider control as cau ses of the SEC. (C) 1998 Academic Press.