Does the Economic Stimulus Package Stimulate Firm Investment and Improve Investment Efficiency? Evidence from China

36 Pages Posted: 18 Aug 2014

See all articles by Qigui Liu

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University

Xiaofei Pan

University of Wollongong

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: August 18, 2014

Abstract

The Economic Stimulus Packages which was introduced in response to the recent global financial crisis has been debated vigorously for its implications for economic efficiency. Using Chinese firms in the period 2003-2013 from the supply side perspective, we show that with the implementation of an economic stimulus package in China, state-owned enterprises (SOEs) receive more bank loans and invest more than non-SOEs. We further find that the economic stimulus package distorts bank lending decisions and reduces firm investment efficiency of SOEs, non-SOEs from favoured industries and regions, and non-SOEs with political connections. Our findings are robust to event study analysis, controlling for bank-level unobserved heterogeneities, and other robustness tests. Overall, our findings support the view that the stimulus package and the associated increase of bank loan supply in China results in a resource misallocation to SOEs, so that resources are invested inefficiently, that is, the stimulus package stimulated investment by SOEs and crowded out investment by privately owned sectors.

Keywords: economic stimulus package, monetary policy, bank loan supply, bank lending, investment efficiency, SOEs

JEL Classification: E5, G18, G34

Suggested Citation

Liu, Qigui and Pan, Xiaofei and Tian, Gary Gang, Does the Economic Stimulus Package Stimulate Firm Investment and Improve Investment Efficiency? Evidence from China (August 18, 2014). 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: https://ssrn.com/abstract=2482265 or http://dx.doi.org/10.2139/ssrn.2482265

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University ( email )

Hangzhou, Zhejiang Province 310058
China

Xiaofei Pan

University of Wollongong ( email )

Wollongong, New South Wales 2500
Australia

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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