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China's “Mercantilist” Government Subsidies, the Cost of Debt and Firm Performance

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  • Lim, Chu Yeong
  • Wang, Jiwei
  • Zeng, Cheng (Colin)

Abstract

China has been adopting a “mercantilist” policy by lavishing massive government subsidies on Chinese firms. Using hand-collected subsidy data on Chinese listed companies, we find that firms receiving more subsidies tend to have a lower cost of debt. However, such firms fail to have superior financial performance. Instead, firms with more subsidies tend to be overstaffed, which demonstrates higher social performance. These results are mainly driven by non-tax-based subsidies rather than tax-based subsidies. Overall, our results suggest that the Chinese government uses non-tax-based subsidies to achieve its social policy objectives at the expense of firms’ profitability.

Suggested Citation

  • Lim, Chu Yeong & Wang, Jiwei & Zeng, Cheng (Colin), 2018. "China's “Mercantilist” Government Subsidies, the Cost of Debt and Firm Performance," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 37-52.
    • Handle: RePEc:eee:jbfina:v:86:y:2018:i:c:p:37-52
    DOI: 10.1016/j.jbankfin.2017.09.004
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    More about this item

    Keywords

    Government subsidies; Cost of debt; Firm performance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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