Blessing or Curse? Government Subsidy Dependence and Stock Price Crash Risk
50 Pages Posted: 24 Nov 2020 Last revised: 18 Jan 2022
Date Written: December 10, 2021
Using a sample of Chinese listed firms from 2003 to 2018, we show that firms that rely heavily on government subsidies face a high risk of stock price crashes. We establish the causality of government subsidy dependence on crash risk using a difference-in-difference approach that takes advantage of an exogenous shock to local government support, namely the Central Commission for Discipline Inspection's anti-corruption campaign since 2013. The positive association mainly manifests in SOEs and firms with weak monitoring and political connections. We investigate additional mechanisms and find that firms that rely on government subsidies have a higher likelihood of accounting restatement and valuation uncertainty. Our findings show that relying on government subsidies imposes significant risk on investors.
Keywords: government subsidy; financial restatements; valuation uncertainty; crash risk
JEL Classification: E60; G28; G33
Suggested Citation: Suggested Citation