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Hidden costs of government-guided funds: Evidence from executive-employee pay gaps

Author

Listed:
  • Ji, Duan
  • Liu, Ming
  • Li, Dan
  • Fan, Hong
  • Zhan, Feng

Abstract

While government support programs are often effective at helping firms achieve their objectives, these programs may have unintended consequences. Motivated by this, this study empirically examines the impacts of receiving investments from government-guided funds (GGFs) on executive-employee pay gaps in Chinese public firms. The results from difference-in-differences analyses show that GGFs investments lead to a significantly greater widening of the pay disparities between executives and employees in recipient firms than in other firms after funding is granted. This widening gap is driven by a larger increase in executive compensation relative to employee wages. The mechanism analysis suggests that increased cash holdings associated with receiving GGFs create financial slack that facilitates managerial opportunism, ultimately resulting in greater pay gaps. These findings reveal an unintended consequence of GGFs, highlighting an overlooked agency cost of government financial support programs.

Suggested Citation

  • Ji, Duan & Liu, Ming & Li, Dan & Fan, Hong & Zhan, Feng, 2025. "Hidden costs of government-guided funds: Evidence from executive-employee pay gaps," Finance Research Letters, Elsevier, vol. 86(PB).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pb:s1544612325017222
    DOI: 10.1016/j.frl.2025.108468
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • D6 - Microeconomics - - Welfare Economics
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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