The stabilizing effect of government guarantees in real economy investment: Evidence from China

This study examines how government guarantees affect the relationship between economic policy uncertainty and corporate investment for Chinese A-share listed companies covering 2012–2019. We find that government guarantees significantly weaken the inhibitory effect of economic policy uncertainty on firms' investment by changing the risk expectations of firms and banks. Mechanism tests show that this relationship is more pronounced in the case of high capital irreversibility, low market competition, high financing constraints, and external financing premiums, which proves the real option and financial friction mechanism. Heterogeneity tests suggest that the stable investment effect of government guarantees is more substantial for firms in lower marketization degree regions, non-state-owned, and more affected by information asymmetry. We further find that government guarantees significantly inhibit under-investment when economic policy uncertainty is high but do not significantly impact over-investment. For high-quality firms with more robust profitability or development capabilities, the positive impact of government guarantees on optimizing resource allocation efficiency is more significant. Our findings contribute to the literature on the cross-sectional variation of the relationship between government intervention and firms’ strategies in China.