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Corporate finance and the governance implications of removing government support programs

Author

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  • Jacob, Martin
  • Johan, Sofia
  • Schweizer, Denis
  • Zhan, Feng

Abstract

Governments worldwide spend trillions of dollars on business support programs. This article examines the implications to investors of phasing out one of these subsidy programs. Our setting takes advantage of a unique quasi-natural experiment, where tax subsidies for Canadian Labour-Sponsored Venture Capital Corporations (LSVCCs) were phased out in one province but not in others. Using a difference-in-differences setting, we show that fund performance—unrelated to the tax credit—decreased substantially following the enactment of the phase-out. We further show empirically that LSVCC managers continued to charge venture capital-like management fees, despite the fact that their investment strategies become more similar to mutual funds. Our data strongly support the idea that investors in companies and/or funds that unexpectedly lose government support face significant financial costs.

Suggested Citation

  • Jacob, Martin & Johan, Sofia & Schweizer, Denis & Zhan, Feng, 2016. "Corporate finance and the governance implications of removing government support programs," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 35-47.
  • Handle: RePEc:eee:jbfina:v:63:y:2016:i:c:p:35-47
    DOI: 10.1016/j.jbankfin.2015.11.005
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    References listed on IDEAS

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    Cited by:

    1. repec:gam:jsusta:v:10:y:2018:i:7:p:2205-:d:154916 is not listed on IDEAS
    2. repec:eee:jbfina:v:86:y:2018:i:c:p:37-52 is not listed on IDEAS
    3. Douglas Cumming & Sofia Johan & Jeffrey G. MacIntosh, 2017. "A drop in an empty pond: Canadian public policy towards venture capital," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 44(1), pages 103-117, March.

    More about this item

    Keywords

    Investment funds; Labour-Sponsored Venture Capital Corporations (LSVCCs); Tax subsidies; Value destruction;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • 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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