Does the Economic Stimulus Package Stimulate Firm Investment and Improve Investment Efficiency? Evidence from China
36 Pages Posted: 18 Aug 2014
Date Written: August 18, 2014
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: Suggested Citation