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The impact of government subsidies on the capacity utilization of zombie firms

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  • Liu, Guangqiang
  • Zhang, Xiaojie
  • Zhang, Wanting
  • Wang, Di

Abstract

Statistics show that many zombie firms in China still enjoy a wide variety of government subsidies. This paper explores the impact of this phenomenon from the perspective of capacity utilization. Specifically, it uses a sample of Chinese zombie firms from 2007 to 2016 to empirically analyze the effect of government subsidies on the capacity utilization of zombie firms. This paper finds that government subsidies have a negative effect on the capacity utilization of zombie firms, and the capacity utilization of subsidized zombie firms is lower than that of unsubsidized zombie firms. Robustness tests and endogeneity tests confirm this finding. Further analysis reveals significant differences in the effects of government subsidies on zombie firms subject to different forms of ownership, different government interventions, and different quality of financial reports. The negative effect of government subsidies on the capacity utilization of zombie firms is more significant in state-owned zombie firms, zombie firms subject to low levels of government intervention, and zombie firms with low quality of financial reports. Government subsidies also distort the investment behaviors of subsidized zombie firms, which in turn leads to poor performance. This paper not only answers the difficult question of whether the government should continue to subsidize zombie firms, but also provides theoretical support for government policy makers. The findings suggest that the government should use subsidies more carefully to help zombie firms “get out of the woods,” and formulate fiscal policies specifically related to zombie firms.

Suggested Citation

  • Liu, Guangqiang & Zhang, Xiaojie & Zhang, Wanting & Wang, Di, 2019. "The impact of government subsidies on the capacity utilization of zombie firms," Economic Modelling, Elsevier, vol. 83(C), pages 51-64.
    • Handle: RePEc:eee:ecmode:v:83:y:2019:i:c:p:51-64
    DOI: 10.1016/j.econmod.2019.09.034
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