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Subsidized overexpansion of Chinese firms

Author

Listed:
  • Han, Miao
  • Zhang, Dayong
  • Bi, Xiaogang
  • Huang, Wei

Abstract

This paper examines the economic consequences of public subsidies to listed firms in China. It reveals that public subsidies can significantly increase the chance of firm overinvestment. However, they do not necessarily resolve the underinvestment problem. These results appear robust when we test various types of subsidies separately, as well as when we analyze the influence of subsidies on the investment-Q sensitivity. Further investigation shows that dividend payout has an important moderating role in this relationship between subsidies and investment. Firms with subsidies, especially those that pay higher cash dividends, have lower future stock returns and valuations than comparable non-subsidized firms. Overall, the main findings of this paper signal a clear government failure to correct market failure in the Chinese capital market.

Suggested Citation

  • Han, Miao & Zhang, Dayong & Bi, Xiaogang & Huang, Wei, 2019. "Subsidized overexpansion of Chinese firms," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 69-79.
    • Handle: RePEc:eee:finana:v:62:y:2019:i:c:p:69-79
    DOI: 10.1016/j.irfa.2019.02.003
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    Cited by:

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    2. Deng, Kebin & Ding, Zhong & Liao, Xiaojie & Zhu, Yushu, 2021. "Staged subsidies and corporate investments: Evidence from Chinese listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    3. Kong, Dongmin & Ji, Mianmian, 2024. "Individual investors’ dividend tax reform and investment efficiency," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1102-1119.
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    6. Ed-Dafali, Slimane & Patel, Ritesh & Iqbal, Najaf, 2023. "A bibliometric review of dividend policy literature," Research in International Business and Finance, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Dividends; Investment efficiency; Market failure; Public subsidies;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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