Government Subsidy Dependence and Stock Price Crash Risk

66 Pages Posted: 24 Nov 2020 Last revised: 8 Jul 2021

See all articles by Obaid Ur Rehman

Obaid Ur Rehman

Southeast University - School of Economics and Management,

Xiaoxing Liu

Southeast University - School of Economics and Management

Kai Wu

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

Ziyan Zhu

Southeast University - School of Economics and Management

Date Written: December 22, 2020

Abstract

This paper shows that stock price crash risk is induced by government subsidy dependence as our
primary rationale. Using a sample of Chinese non-financial listed firms, our results expose that
stock price crash risk is affected by non-tax-based government subsidy dependence, specifically
in zombie firms. We identify that our primary rationale is salient in SOEs, low monitoring firms,
and politically connected firms. To capture the endogeneity issue, we report that our primary
rationale is salient in the Chinse regions of high marketization level. Further, we find that valuation
uncertainty is a significant mediating factor between stock price crash risk and government subsidy dependence. To validate our baseline results, we perform a battery of robustness checks such as identification issues using a matched sample, alternative variable, and model measurements, excluding crisis years and including industry fixed effects. Our findings highlight the negative consequences of government subsidy dependence on firms' financial risk and implications for regulatory agencies and investors.

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

JEL Classification: E60; G28; G33; L20

Suggested Citation

Rehman, Obaid Ur and Liu, Xiaoxing and Wu, Kai and Zhu, Ziyan, Government Subsidy Dependence and Stock Price Crash Risk (December 22, 2020). 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)

Xiaoxing Liu

Southeast University - School of Economics and Management

Sipailou 2#
Nanjing, Jiangsu Province 210096
China

Kai Wu

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

Beijing
China

Ziyan Zhu

Southeast University - School of Economics and Management

Sipailou 2#
Nanjing, Jiangsu Province 210096
China

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