China's 'Mercantilist' Government Subsidies, the Cost of Debt and Firm Performance

53 Pages Posted: 30 Jun 2016 Last revised: 4 Sep 2017

See all articles by Chu Yeong Lim

Chu Yeong Lim

Nanyang Technological University (NTU)

Jiwei Wang

Singapore Management University - School of Accountancy

Cheng (Colin) Zeng

Hong Kong Polytechnic University

Date Written: August 31, 2017

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.

Keywords: Government subsidies, cost of debt, firm performance

JEL Classification: G32, G38, H25, H71

Suggested Citation

Lim, Chu Yeong and Wang, Jiwei and Zeng, Cheng, China's 'Mercantilist' Government Subsidies, the Cost of Debt and Firm Performance (August 31, 2017). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2802465 or http://dx.doi.org/10.2139/ssrn.2802465

Chu Yeong Lim

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Jiwei Wang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore
(65) 6828 0616 (Phone)
(65) 6828 0600 (Fax)

HOME PAGE: http://www.mysmu.edu/faculty/jwwang/

Cheng Zeng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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