Ownership Structure, Government Subsidy And Capital Cost

Governments usually give companies a variety of subsidies in the form of production subsidies, reward or tax breaks in order to promote and support the development of some industries. Subsidies has become an important means of regulating macro economy and maintaining social stability. However, many domestic and foreign scholars began to question the behavior that the Chinese government gives huge subsidies to state-owned enterprises. They think that China’s market economy is not perfect and the government subsidies system is not transparent. Besides these massive government subsidies may not promote the development of enterprises at the micro, and more seriously will cause the rent-seeking behavior of the enterprise. As an important means of national economic regulation, government subsidies’ significance in the macro is self-evident and understandable. But from the enterprise microscopic consideration, could the government subsidies really become a kind of new financing channels? Could the government subsidies really increase enterprise value and improve the market competition ability of enterprises? Based on this, this article has carried on the related theoretical analysis and empirical test.In order to analyze the impact of government subsidies for the enterprises with higher state-owned capital, this paper selects utility companies which have many state holding enterprises as the research sample. Utility companies are different from the general competitive companies, which have the dual pursuit that is social welfare goal and the enterprise financial goal. From the point of social welfare, the products and services provided by the utility companies are related to the national economy and people’s livelihood and are the basic guarantee of economic development and people’s life. From the point of financial goal, utility companies’ financial goal, like the most enterprises, is to maximize the shareholder wealth. Through theoretical analysis and empirical research, we study the correlation of equity structure, government subsidies and cost of capital in utility companies. Regression results show that the government subsidies have significant negative correlation with the cost of capital, which is in agreement with the theoretical assumptions. This means government subsidies for utilities can become a new financing channel, which don’t have to pay any price and can lower the cost of capital of enterprise level in the form of required return rate to zero. Considering the controlling shareholder’s influence on the cost of capital, we can find that the role of government subsidies in nonstate-owned utility companies is higher than state- owned utility companies, which is in agreement with the theoretical assumptions. This can further illustrate that utility companies implement mixed ownership reform, introducing non-state-owned capital, practicing the state-owned and non-state-owned capital cross-shareholding, which can significantly enhance the role of government subsidies to corporate value andcompetitiveness.