Fiscal expenditure, equity type, and firms’ operational performance

Abstract

In China, expansive fiscal expenditure creates significant fiscal orders. However, whether, which, and how firms benefit from these fiscal orders is neglected in the literature. We configure a theoretical framework to separately analyse the effects of fiscal expenditure on product and capital markets. In the empirical analysis, we use A-share firms listed in China between 2003 and 2013 as our sample to investigate the relationship between fiscal expenditure and firms’ performance. We find that the performance of state-owned enterprises (SOEs) increases with increasing fiscal expenditure by improving asset utilisation and profitability. Corporate governance metrics such as management incentives and independent boarders can adjust this relationship. Our findings indicate that although fiscal orders are mainly acquired and executed by SOEs, the efficiency of expansive fiscal expenditure would be improved if more non-SOEs were preferentially targeted instead.