IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v86y2018icp37-52.html

Some searches may not work properly. We apologize for the inconvenience.

   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426617302169
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2017.09.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Guariglia, Alessandra & Liu, Xiaoxuan & Song, Lina, 2011. "Internal finance and growth: Microeconometric evidence on Chinese firms," Journal of Development Economics, Elsevier, vol. 96(1), pages 79-94, September.
    2. Fan, Joseph P.H. & Wong, T.J. & Zhang, Tianyu, 2007. "Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms," Journal of Financial Economics, Elsevier, vol. 84(2), pages 330-357, May.
    3. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
    4. Leeth, John D. & Scott, Jonathan A., 1989. "The Incidence of Secured Debt: Evidence from the Small Business Community," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(3), pages 379-394, September.
    5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    6. Zou, Hong & Adams, Mike B., 2008. "Debt Capacity, Cost of Debt, and Corporate Insurance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(2), pages 433-466, June.
    7. Feng, Xunan & Johansson, Anders C. & Zhang, Tianyu, 2015. "Mixing business with politics: Political participation by entrepreneurs in China," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 220-235.
    8. Joel F. Houston & Liangliang Jiang & Chen Lin & Yue Ma, 2014. "Political Connections and the Cost of Bank Loans," Journal of Accounting Research, Wiley Blackwell, vol. 52(1), pages 193-243, March.
    9. Anderson, Ronald C. & Mansi, Sattar A. & Reeb, David M., 2004. "Board characteristics, accounting report integrity, and the cost of debt," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 315-342, September.
    10. Chaney, Paul K. & Faccio, Mara & Parsley, David, 2011. "The quality of accounting information in politically connected firms," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 58-76, February.
    11. Borisova, Ginka & Fotak, Veljko & Holland, Kateryna & Megginson, William L., 2015. "Government ownership and the cost of debt: Evidence from government investments in publicly traded firms," Journal of Financial Economics, Elsevier, vol. 118(1), pages 168-191.
    12. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    13. Trueman, Brett, 1986. "The Relationship between the Level of Capital Expenditures and Firm Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(2), pages 115-129, June.
    14. Rosenstein, Stuart & Wyatt, Jeffrey G., 1990. "Outside directors, board independence, and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 26(2), pages 175-191, August.
    15. 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.
    16. He, Guanming, 2016. "Fiscal Support and Earnings Management," The International Journal of Accounting, Elsevier, vol. 51(1), pages 57-84.
    17. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    18. Brandt,Loren & Rawski,Thomas G. (ed.), 2008. "China's Great Economic Transformation," Cambridge Books, Cambridge University Press, number 9780521885577, November.
    19. Bradley, Daniel & Pantzalis, Christos & Yuan, Xiaojing, 2016. "Policy risk, corporate political strategies, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 254-275.
    20. Firth, Michael & Lin, Chen & Liu, Ping & Wong, Sonia M.L., 2009. "Inside the black box: Bank credit allocation in China's private sector," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1144-1155, June.
    21. repec:bla:jecsur:v:13:y:1999:i:2:p:119-47 is not listed on IDEAS
    22. Ginka Borisova & William L. Megginson, 2011. "Does Government Ownership Affect the Cost of Debt? Evidence from Privatization," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2693-2737.
    23. Qi, Yaxuan & Roth, Lukas & Wald, John K., 2010. "Political rights and the cost of debt," Journal of Financial Economics, Elsevier, vol. 95(2), pages 202-226, February.
    24. Meghana Ayyagari & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2010. "Formal versus Informal Finance: Evidence from China," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3048-3097, August.
    25. Tian, Lihui & Estrin, Saul, 2008. "Retained state shareholding in Chinese PLCs: Does government ownership always reduce corporate value?," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 74-89, March.
    26. Baysinger, Barry D & Butler, Henry N, 1985. "Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 1(1), pages 101-124, Spring.
    27. Chen, Xiao & Lee, Chi-Wen Jevons & Li, Jing, 2008. "Government assisted earnings management in China," Journal of Accounting and Public Policy, Elsevier, vol. 27(3), pages 262-274.
    28. Brandt,Loren & Rawski,Thomas G. (ed.), 2008. "China's Great Economic Transformation," Cambridge Books, Cambridge University Press, number 9780521712903, November.
    29. Wei, Zuobao & Xie, Feixue & Zhang, Shaorong, 2005. "Ownership Structure and Firm Value in China's Privatized Firms: 1991–2001," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(1), pages 87-108, March.
    30. Haley, Usha C.V. & Haley, George T., 2013. "Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy," OUP Catalogue, Oxford University Press, number 9780199773749, Decembrie.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guariglia, Alessandra & Liu, Xiaoxuan & Song, Lina, 2011. "Internal finance and growth: Microeconometric evidence on Chinese firms," Journal of Development Economics, Elsevier, vol. 96(1), pages 79-94, September.
    2. Qu Deng & Hezun Li & Hong Yue, 2024. "Public–private partnership, cost of debt and accounting conservatism," Economics and Politics, Wiley Blackwell, vol. 36(1), pages 432-482, March.
    3. Jiang, Haiyan & Hu, Yuanyuan & Zhang, Honghui & Zhou, Donghua, 2018. "Benefits of Downward Earnings Management and Political Connection: Evidence from Government Subsidy and Market Pricing," The International Journal of Accounting, Elsevier, vol. 53(4), pages 255-273.
    4. Ding, Sai & Guariglia, Alessandra & Knight, John, 2013. "Investment and financing constraints in China: Does working capital management make a difference?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1490-1507.
    5. Thanh Ngo & Jurica Susnjara, 2020. "Government contracts and US bond yield spreads: A study on costs and benefits of materialized political connections," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 1059-1085, July.
    6. Ding, Rong & Li, Jialong & Wu, Zhenyu, 2018. "Government affiliation, real earnings management, and firm performance: The case of privately held firms," Journal of Business Research, Elsevier, vol. 83(C), pages 138-150.
    7. Cull, Robert & Li, Wei & Sun, Bo & Xu, Lixin Colin, 2015. "Government connections and financial constraints: Evidence from a large representative sample of Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 271-294.
    8. Zhang, Dongyang & Liu, Deqiang, 2017. "Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?," Economic Systems, Elsevier, vol. 41(2), pages 179-202.
    9. Zhao, Yujie & Zhou, Donghua & Zhao, Kangsheng & Zhou, Ping, 2019. "Is the squeaky wheel getting the grease? Earnings management and government subsidies," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 297-312.
    10. Liu, Li & Liu, Qigui & Tian, Gary & Wang, Peipei, 2018. "Government connections and the persistence of profitability: Evidence from Chinese listed firms," Emerging Markets Review, Elsevier, vol. 36(C), pages 110-129.
    11. Kusnadi, Yuanto & Yang, Zhifeng & Zhou, Yuxiao, 2015. "Institutional development, state ownership, and corporate cash holdings: Evidence from China," Journal of Business Research, Elsevier, vol. 68(2), pages 351-359.
    12. Go Yano & Maho Shiraishi, 0. "Economic and Political Motivations in Debt Finance in China: Bank Lending and Trade Credit Offering," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 0, pages 1-42.
    13. Guo, Kai & Ke, Bin & Tang, Song, 2023. "Private firms' financial constraints and share pledging by controlling shareholders of publicly listed firms: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 80(C).
    14. Shailer, Greg & Wang, Kun, 2015. "Government ownership and the cost of debt for Chinese listed corporations," Emerging Markets Review, Elsevier, vol. 22(C), pages 1-17.
    15. Naeem Tabassum & Satwinder Singh, 2020. "Corporate Governance and Organisational Performance," Springer Books, Springer, number 978-3-030-48527-6, April.
    16. Alessandra Guariglia & Simona Mateut, 2011. "Political affiliation and trade credit extension by Chinese firms," Discussion Papers 11/12, University of Nottingham, GEP.
    17. Shujun Ding & Chunxin Jia & Craig Wilson & Zhenyu Wu, 2015. "Political connections and agency conflicts: the roles of owner and manager political influence on executive compensation," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 407-434, August.
    18. Wei, Xiaokun & Ruan, Qingsong & Lv, Dayong & Wu, Youyi, 2022. "Transportation infrastructure and bond issuance credit spread: Evidence from the Chinese high-speed rail construction," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 30-47.
    19. Lee, Charles M.C. & Qu, Yuanyu & Shen, Tao, 2019. "Going public in China: Reverse mergers versus IPOs," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 92-111.
    20. Xinyu Yu & Ping Wang, 2020. "Government control and the value of cash: evidence from listed firms in China," Review of Quantitative Finance and Accounting, Springer, vol. 55(4), pages 1341-1369, November.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:86:y:2018:i:c:p:37-52. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.