Purposes of government subsidy and firm performance

Abstract

This study examines the effect of a government subsidy’s purpose on firm performance. Using a sample of Chinese listed firms from 2007 to 2012, we find that a government subsidy affects firm performance. Specifically, a government subsidy is negatively associated with firm performance, and such a negative effect is primarily driven by a non-specified type of subsidy. Further, such an effect is more pronounced for state-owned enterprises (SOEs) compared with non-SOEs. The government quality has a positive effect on the likelihood of a specified subsidy and the performance impact of a non-specified subsidy. Further analyses suggest that a non-specified subsidy reduces investment efficiency and results in rent-seeking activities. This study sheds light on the effect of government subsidies from a new perspective, and has important policy implications for regulators to improve the effectiveness of government subsidies.