China's 'Mercantilist' Government Subsidies, the Cost of Debt and Firm Performance
53 Pages Posted: 30 Jun 2016 Last revised: 4 Sep 2017
Date Written: August 31, 2017
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
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