China's "Mercantilist" government subsidies, the cost of debt and firm performance

• Main Authors: LIM, Chu Yeong, WANG, Jiwei, ZENG, Cheng (Colin)
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Government subsidies; cost of debt; firm performance; Accounting; Asian Studies; Corporate Finance; Economic Policy
• Online Access: https://ink.library.smu.edu.sg/soa_research/1766; https://ink.library.smu.edu.sg/context/soa_research/article/2793/viewcontent/China_Mercantilist_Subsidies_2017_afv.pdf
• Institution: Singapore Management University

China has been adopting a “mercantilist” policy by lavishing massive government subsidies on Chinese firms. Using hand-collected subsidy data on Chinese listed companies, we find that firms receiving more subsidies tend to have a lower cost of debt. However, such firms fail to have superior financial performance. Instead, firms with more subsidies tend to be overstaffed, which demonstrates higher social performance. These results are mainly driven by non-tax-based subsidies rather than tax-based subsidies. Overall, our results suggest that the Chinese government uses non-tax-based subsidies to achieve its social policy objectives at the expense of firms’ profitability.