Government Engineering And Corporate Finance

Governments of developing nations face the daunting task of catching up with developed nations.During the recent 30 years,China appears to be winning this competition.How is this success forged?We believe that an important factor is the role of the government in formulating national industrial policies.Firstly,I give a brief history of China's Five-Year Plan,focusing on the effect of the industrial policy on China's economy.In this part,examining the experience of the road of China's heavy industrilazation in 1950s and the achievement of auto-industry in recent decades,I find the fundamental influence of the industrial policy on China's economy.Then I put forward the hypotheses related corporate financing,investment,accounting quality,and economic consequences.Accordingly,Examining China's strategic five-year national plans during 1990-2010,I find that industries supported by the government enjoy faster growth in equity finance(initial and seasoned public offerings)and debt finance(bank loans).This pattern is more pronounced in industries with heavier state ownership.Further,as their respective market orientation improves,the government's control of the IPO,SEO and bank loan markets declines,reflecting an important characteristic of transitional economies.Then,in terms of investment,I find the higher level of investment in the industries supported by government,both in state-owned firms and non-state-owned ones.Another finding is focus on investment efficiency mearsuring by the over-investment.I find the significantly higher over-investment in supported industries,but this phenomenon only exists in non-state-owned firms.Also,I investigate whether the quality of accounting earnings is systematically associated with the industrial policy,a "big push" national strategy in China.Overall,our results show that favored firms or industries by the government exhibit a higher quality of accounting earnings.And the association is more pronounced with the state-ownership.Using IPO and SEO as an event,I find that favored firms are not inclined to engage in earnings management at IPO/SEO year.The results survived the industry fixed effect,firm specific state ownership,and product market competition.Finally,we examine the consequence of five-year plan national strategies and find the following patterns.While government supported industries have lower market returns and a higher ratio of non-performing debt,in industries with heavier state ownership,the five-year plan national strategy brings improvement in industry performance.For the four five-year plans that we examine,government supported industries underperform other industries.However,during the recent two five-year plans,government support appears to have improved the performance of supported industries which appears to converge towards that of other industries.This suggests that the government learns during economic transition and its strategies tilt towards industries undervalued by the market in the short-run.All of findings provide a new perspective on the role played by government national strategies on corporate finance.