Blessing or Curse? Government Subsidy Dependence and Stock Price Crash Risk

50 Pages Posted: 24 Nov 2020 Last revised: 18 Jan 2022

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

Date Written: December 10, 2021

Abstract

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

Rehman, Obaid Ur and Liu, Xiaoxing and Wu, Kai, Blessing or Curse? Government Subsidy Dependence and Stock Price Crash Risk (December 10, 2021). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
103
Abstract Views
620
rank
360,621
PlumX Metrics