The existing literature provides extensive evidence that firms intentionally structured lease arrangements to achieve off-balance-sheet accounting treatment prior to ASU 842 (FASB, 2016) and IFRS 16 (IASB, 2016). However, this study finds the opposite for Chinese state-owned enterprises (SOEs): compared to non-SOEs, SOEs in China have a higher tendency to use finance leases rather than operating leases. This result remains significant after we control for the possibility that Chinese capital providers are discriminatively extending credit to SOEs in the form of finance leases. We explain SOEs' preference for finance leases by their executives' empire building incentives. Such incentives are created by the executives' hunger for compensation, promotion and subsidies, which are determined by the government. Consistently, we find that SOEs' engagement in finance leases increases with their incentives to expand the firms' size. And indeed, SOE executives obtain more compensation and subsidies by growing their firms with finance leases. Finally, we find that SOEs with higher borrowing costs structure more finance lease arrangements. Such structuring further increases SOEs' financial leverage and, to some extent, decreases their corporate value. Taken together, these results suggest that the benefit of the ASU 842 (or IFRS 16), which aims to bring leased assets onto the balance sheet, may be impaired in situations where executives have strong incentives to build empires.

We identify a sample of firms with directors employed by institutional investors and examine the effect of a direct channel of institutional monitoring. Using difference-in-differences tests, we find weak evidence that institutional directors have a positive effect on informational efficiency. More importantly, institutional directors have a significantly positive impact on stock returns over the long run. Further analysis shows that the presence of institutional directors leads to a slight increase of managerial entrenchment. Consistent with the notion that entrenched managers reduce risk-taking, we also find significant decreases in R&D investments and financial leverage, and significant increases in payouts for firms with institutional directors. The findings suggest that aligning with the interest of long-term investors, institutional directors deter firms from pursuing potentially value-decreasing investment projects and influence firms to return value to investors through lower debts and higher payouts, mainly share repurchases.