Corporate Finance and the Governance Implications of Removing Government Support Programs
43 Pages Posted: 12 Jan 2014 Last revised: 30 Aug 2015
Date Written: August 29, 2015
Governments worldwide spend trillions of dollars on business support programs. This article examines the implications to investors of phasing out one of these subsidy programs. Our setting takes advantage of a unique quasi-natural experiment, where tax subsidies for Canadian Labour-Sponsored Venture Capital Corporations (LSVCCs) were phased out in one province but not in others. Using a difference-in-differences setting, we show that fund performance — unrelated to the tax credit — decreased substantially following the enactment of the phase-out. We further show empirically that LSVCC managers continued to charge venture capital-like management fees, despite the fact that their investment strategies become more similar to mutual funds. Our data strongly support the idea that investors in companies and/or funds that unexpectedly lose government support face significant financial costs.
Keywords: Investment funds, Labour-Sponsored Venture Capital Corporations (LSVCCs), tax subsidies, value destruction
JEL Classification: G11, G18, G23, G24, H25, H71
Suggested Citation: Suggested Citation