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

Chuyeong Lim, Jiwei Wang, Cheng Zeng

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Abstract

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.
Original languageEnglish
Pages (from-to)37-52
JournalJournal of Banking & Finance
Volume86
Early online date8 Sep 2017
DOIs
Publication statusPublished - 8 Sep 2017

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