Functional Subsidies, Selective Subsidies and Corporate Investment Efficiency: Evidence from China

Abstract

We investigate the relationship between functional subsidies, selective subsidies, and investment efficiency through meticulous compilation of information on government subsidies and the implementation of an innovative categorization methodology based on the nature and timing of funds (ex-ante versus ex-post). We find that the effect of subsidies exhibits asymmetry by alleviating underinvestment while exacerbating overinvestment. Additionally, functional subsidies exert a stronger influence compared to selective subsidies. Financial constraints are found to serve as the major mechanism, indicating that firms with easier access to financing may not effectively utilize subsidies, while those facing severe financial constraints are less prone to misusing them.

Keywords: functional subsidy, selective subsidy, investment efficiency, financial constraint