Randomized inspection and firm's government subsidies: A natural experiment in China

Abstract

This paper investigates the causal effects of the China Securities Regulatory Commission (CSRC)’s inspection on firm's government subsidies using a randomized inspection policy in the context of China. Our difference-in-differences estimation shows that inspections of regulators significantly reduce firm's subsidies by around [10.24%, 26.03%]. Plausible mechanisms are the reduction of government-firm connection, information asymmetry, and rent-seeking. Our findings are more pronounced among firms with poor corporate governance, fewer policy burdens, and higher financial risks. We also find a significant industrial and regional spillover effect and a promotion in firm performance. Overall, this paper evaluates the effects of external regulation on government subsidies and emphasizes the importance of supervision in correcting the helping hand of local governments, thus providing timely implications for policymakers.