Study On The Market Reaction To Listed Companies’ Announcement Of Government Subsidies

The relationship between government and enterprise has been an important subject in academic research. As China is still in the transition from planned economy to market economy, this relationship has been completely revealed by securities market, the barometer of national economy. For one thing, the interest of many listed enterprises restructured from state-owned enterprises and that of government are intricately woven together. In order to increase social employment, compensate local enterprises for policy burden and meet all targets of capital market, local government will step in the earnings management of listed enterprises by granting them a large sum of subsidies. For another, for the sake of macro-economic regulation and control, supporting medium-level industries and innovation in micro-technology, government at all levels have granted many listed enterprises special fiscal subsidies to lead the investment orientation, cultivate enterprise’s core competence and realize the goal of adjusting the industrial structure of national economy. Government subsidies have bettered the financial situation of listed enterprises, improved their business performance and increased the accounting earnings during the reporting period, while special subsidies can improve operation and profitability in the long term. Once these enterprises announce these grant subsidies, the information hinted from this signal can increase investors’ expectation on their future operation, leading to increase in stock price and thus generate a certain amount of abnormal residuals, a market reaction in the stock market.With the market reaction triggered by the announcement of government subsidies as the subject of research, this paper first conducts a test and analysis on the existence of the market reaction caused by the announcement of government subsidies with the method of event study and then based on the cumulative average abnormal residuals, it makes an empirical study on the major factors affecting the market reaction triggered by the announcement of government subsidies by using multiple regression analysis.A comparative research on the classified population based on these major factors shows the following results:(1) The announcement of government subsidies being granted to listed enterprises does contain some information that can bring significantly positive market reaction on the announcement day compared with that before the day. However, the abnormal residuals tend to disappear after the day. This phenomenon indirectly proves that our A share market is still a weak-form efficient market.(2) A further multiple regression analysis and group comparison shows that①there is scale effect in market reaction triggered by the announcement of government subsidies, meaning small-sized enterprises can get more cumulative average abnormal residuals,②when government subsidies take up a large proportion of the profit for the term, the delayed action by investors keeps the cumulative average abnormal residuals on the increase, reflecting the irrationality of investors,③investors prefer to think high of including government subsidies in deferred income so that they can get more cumulative average abnormal residuals.④the final control, either in state-owned enterprise or private enterprise, does not have significant impact on market reaction triggered by the announcement of government subsidies.(3)A study on population and classified samples shows that insider trading is quite common in the event of listed enterprises releasing being granted government subsidies. But as insider trading can affect the operating efficiency of securities market and infringe the interest of uninformed traders, it shall be monitored and punished.At the end of this paper, based on the above study, the author puts forward some related policy suggestions on how to ensure the veracity of the announcement of government subsidies, strengthen the effort to monitor and punish inside trading, improve the structure of investors and enhance investor education.