Government competition, equity investment and subsidy

Abstract

Considering China’s unique institutional background of financial decentralisation and political centralisation, by studying data on 3,021 listed enterprises from 2007 to 2014, this paper mainly investigates the influences of listed enterprises’ equity investment on obtaining subsidies from local governments. Our research finds that listed enterprises can obtain local government subsidies more easily by making an equity investment in the local government region. Meanwhile, the frequency and amount of the equity investment or the occasion for a first equity investment in the area can significantly increase enterprises’ subsidies from the local government. Moreover, the positive influence of equity investment on obtaining government subsidies is more pronounced in areas faced with high GDP pressure. The research further finds that government subsidies obtained through equity investment have a significantly negative association with corporate performance, which means that the equity investments of enterprises that are made for the purpose of obtaining subsidies are speculative in nature. This paper studies the relationship between investment behaviour of enterprises and government subsidies from the perspective of government competition and rent-seeking, reporting the evidence and ways of tunnelling between enterprises and government. We aim at providing new standards of evaluation for the investment behaviour of listed enterprises and offering a theoretical basis to local governments to control the economy rationally.