Government Fiscal Support, Excessive-employment And Corporate Valuation

Excessive-employment is one of the biggest problems faced by Chinese companies, especially State Owned Enterprises (SOEs). As a rational entity, each company should maintain a proper level of employment. Since the dismissing redundant will lead to higher unemployment rate, which is a social problem the government has deep concern. As a consequence, the government agencies will take whatever measures to prevent the dismissing of redundant from enterprises. This study will analyze the impact of government measures on Chinese listed firms'employment policy, and examine the valuation effect of excessive-employment.Based on a sample of all non-financial A-share firms from year 2001 to 2008, this paper analyzes the impact of government subsidy, credit support and tax relief on the employment behavior of listed firms. Besides, the valuation effect of excessive employment is also examined. Still further, the differences between stated owned vs. non-stated owned enterprises in terms of government support are also studied. Finally, this paper analyzes the adjustment of government measures as a response to financial crisis in year 2008.The empirical results show government subsidy and credit support have significant impact on the excessive-employment of listed companies in China. Still more, there is price discount associated with stocks whose companies exhibit excessive-employment. Compared with non-SOEs, the employment level of SOEs is less influenced by government incentive measures. Finally, government takes great support through subsidy during the financial crisis in year 2008. Overall, my study indicates that the excessive-employment of listed firms is closely related with government interventions, and shareholder identity has some impact on the extent of government interventions. Nevertheless, the stock market attaches a price discount to listed firms with excessive-employment.