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The ripple effect: How subsidies transform firm behavior

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  • Pérez-Amuedo, José Antonio
  • Hassan, M. Kabir
  • Houston, Reza

Abstract

This study examines how government support influences firm behavior across profitability, investment, and employment. Using a comprehensive database linking local, state, and federal subsidies to firm-level financial data, we assess how different subsidy types shape firm decisions. We find that cost-reducing subsidies are more effective than revenue-increasing ones in boosting profitability, employment, and strategic investment. Firms that commit to hiring or capital investment upon receiving subsidies achieve superior outcomes. These findings highlight the importance of aligning subsidy design with firm-level incentives and broader economic goals.

Suggested Citation

  • Pérez-Amuedo, José Antonio & Hassan, M. Kabir & Houston, Reza, 2025. "The ripple effect: How subsidies transform firm behavior," Journal of Corporate Finance, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:corfin:v:95:y:2025:i:c:s0929119925001488
    DOI: 10.1016/j.jcorpfin.2025.102880
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    Keywords

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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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