Government Subsidy Dependence and Stock Price Crash Risk

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See all articles by Xiaoxing Liu

Xiaoxing Liu

Southeast University (China) - School of Economics and Management

Obaid Ur Rehman

Southeast University

Kai Wu

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

Ziyan Zhu

Southeast University (China) - School of Economics and Management

Date Written: October 11, 2020

Abstract

We evaluate the association between government subsidy dependence and stock price crash risk for a large sample of Chinese non-financial listed firms from 2003 to 2018. The results show that firms with high dependence on government subsidies are associated with great stock price crash risk. The decomposition of government subsidies shows that fiscal subsidies are the driving force of stock price crashes. The decomposition of government subsidies shows that fiscal subsidies are the driving force of stock price crashes. The positive association is more pronounced in state-owned enterprises and firms with strong political connection and weak monitoring. Moreover, we identify financial restatement and valuation uncertainty as the two possible mechanisms through which government subsidy dependence increase crash risk. Our findings highlight the negative consequences of government subsidy on financial risk of firms and provide implications for regulatory agencies and investors.

Keywords: government subsidy, crash risk, ultimate ownership, monitoring effectiveness

JEL Classification: E60; G28; G33; L20

Suggested Citation

Liu, Xiaoxing and Rehman, Obaid Ur and Wu, Kai and Zhu, Ziyan, Government Subsidy Dependence and Stock Price Crash Risk (October 11, 2020). Available at SSRN: https://ssrn.com/abstract=

Xiaoxing Liu

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

Sipailou 2#
Nanjing, Jiangsu Province 210096
China

Obaid Ur Rehman

Southeast University ( email )

Sipailou 2#
Nanjing, Jiangsu Province 210096
China

Kai Wu (Contact Author)

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

Beijing
China

Ziyan Zhu

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

Sipailou 2#
Nanjing, Jiangsu Province 210096
China

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