Government Subsidies and Managerial Slack: Evidence from China

Abstract

This paper examines the association between government subsidies and firm-level managerial slack for a sample of Chinese listed firms over the period 2005–2018. Managerial slack is the excess spending, compensation, and perquisites consumed by managers at the expense of shareholders’ wealth. Measuring managerial slack as the abnormal administrative expenses following Fang, He, and Conyon (2018a) and Fang, He, and Shaw (2018b), we find that government subsidies are positively associated with firms’ managerial slack. This positive association, however, is attenuated for firms with strong internal control and firms headquartered in regions with a high level of social trust. Further analysis demonstrates that the positive association is driven by firms receiving non-tax-related government subsidies. Our main result remains robust after addressing endogeneity concerns. Finally, we show that the stock market penalizes subsidy-receiving firms with high managerial slack.

Keywords: government subsidy, managerial slack, China, state-owned enterprises, internal control, social trust