| Chinese listed companies tend to receive substantial subsidies from local government, as evidenced by the details of non-recurring gains and losses reported by these firms in recent years. Government subsidies are provided in various formats, including direct funding, interest subsidy and tax return etc. The subsidies have become a significant tool for local government to develop local economy and regulate the private sector, leading to a significant impact on the capital market. I empirically examine the determinants and consequences of government subsidies. The research goal is to evaluate the use of government financial fund, understand the actual operating capacity from investor’s perspective, and shed light on the information disclosure requirements of regulatory authorities.I first review the prior literature on the determinants and consequences of domestic and foreign government subsidies. I then select a set of sample firms listed in the Shenzhen and Shanghai Stock Exchanges from Year 2007 to Year 2013. This sample period is chosen since the new accounting standards are implemented in 2006. I then examine the following five hypotheses about the determinants of government subsidy:(1) the higher the revenue received by the local Government, the larger the subsidies provided to local listed companies;(2) government subsidies to manufacturing, mining and transport, storage and postal services sectors are generally higher than the rest of the market;(3) the closer a firm’s political relationship with the local government, the easier it is to obtain government subsidies;(4) the greater the economic contribution of a listed company to the local economy, the more government subsidies it could obtain from the government;(5) the worse the short-term solvency condition of a listed company, the more Government subsidies would it obtain. These hypotheses are tested using multivariate regressions.Further, I compare listed companies’ ROE after excluding government subsidies to test for possible earnings management behavior using the frequency distribution method.I conclude the paper by summarizing the main empirical findings and providing policy recommendations. |
