Reform of fiscal hierarchy and corporate innovation: Evidence from the ‘Province-Managing-County’ fiscal reform in China

Abstract

The “Province-Managing-County” (PMC) fiscal reform in China provides county governments with more power of directly applying for and distributing financial funds. We use the matching data of Chinese A-share listed companies and fiscal system reform data of PMC and employ a difference-in-differences model. We find that this financial system reform significantly improves corporate innovation. The potential mechanism is the enhancement of government subsidies, thereby alleviating financial constraints. Results are stronger for firms with higher degree of financial constraints, private ownership, and firms in regions with higher degree of government intervention. Overall, this study deepens the understanding of the PMC reform and enriches the research on fiscal policy and enterprise behavior.