Unveiling the Hidden Risks of Government Subsidy Reliance: Evidence from Stock Price Crashes

61 Pages Posted: 24 Nov 2020 Last revised: 22 Dec 2023

See all articles by Obaid Ur Rehman

Obaid Ur Rehman

Southeast University - School of Economics and Management,

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: December 13, 2023

Abstract

This paper investigates the hidden risk associated with government subsidy reliance for a sample of Chinese-listed firms from 2007 to 2021. We find a significant positive association between firms' reliance on government subsidies and their likelihood of experiencing stock price crashes. The results are robust to difference-in-difference and instrumental variable approaches establishing causality. The effect is more pronounced for financially constrained and politically connected firms. Furthermore, higher subsidy dependence worsens corporate information disclosure and amplifies operational fragilities, validating the underlying mechanisms. The results have important policy implications on the need for nuanced reforms in subsidy program design to maintain their stabilizing benefits while curtailing distortions that engender fragility.

Keywords: government subsidy; information disclosure; operational risk; crash risk

JEL Classification: E60; G28; G33

Suggested Citation

Rehman, Obaid Ur and Wu, Kai, Unveiling the Hidden Risks of Government Subsidy Reliance: Evidence from Stock Price Crashes (December 13, 2023). Available at SSRN: https://ssrn.com/abstract=3707986 or http://dx.doi.org/10.2139/ssrn.3707986

Obaid Ur Rehman (Contact Author)

Southeast University - School of Economics and Management, ( email )

School of Economics and Management,
Jiulonghu Campus, Jiangning District
Nanjing, Jiangsu Province 211189
China
+18851733136 (Phone)

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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