Government Controller: Shelter，or Invest?

LIAO Materials Development Co. Ltd became the first special treatment (ST) companyon April28th,1998. From then on, along with increasing number of public companies, thenumber of ST companies was expanding gradually as well. In the same time, as a specialgroup, ST companies were attracting more attentions in public. By the end of December31st,2010, in all stock market,1,530public corporations had become ST companies, making up8.59%of all listed companies which proved that ST companies had become playing animportant role.According to Corporation Law in China, public companies who were sufferinglosses three years in succession would be disqualified from stock exchange listing. But inorder to maintain politic image, some local governments sacrifice huge financial funds tosupport dying ST companies and towards these companies, government subsidy obviously hasbecome a straw to grasp. Currently, government is managing economy through adjustmentand control from the big picture. For example, establish and implement finance and currencypolicy and adjust structures to ensure economy increasing continuously, stably and healthily;establish and implement industry criteria and standards to guide and supervise industrydevelopment. However, some corporations take the responsibilities for local or centralgovernments, especially those public companies who represent development of localeconomy and stability of the society. Therefore, concerning politic image, local governmentswould rather apply financial allowance to save companies. Besides, due to region discrepancy,the less developed the area is; the more extent of government intervention would be and theeasier companies would obtain financial allowance.This essay selects all the ST companies in A stock market in the years2008to2010as asample, and demonstrates the difference in government subsidy towards differentshareholders and the long term influence of government subsidy towards company financialconditions. Besides, this essay not only analyzes data of these governments supported STcompanies from several aspects, but also compares impacts of different explanatory variables,trying to help investors and related people to better understand financial information of STcompanies.Research outcomes:First of all, it is easier to obtain government subsidy and get more if government is the largest shareholder and the same situation happens in central and west regions of China.Secondly, government subsidy actually did not improve corporations’ long termperformance. To some extent, this allowance encouraged risks and did not make companies toachieve expected objectives.Creations of this essay:Firstly, it brings a different result comparing to previous study. Through research andanalysis, this essay has proved that government subsidy in fact could result in lowperformance instead of improvement in a long term.Secondly, this essay collects data from year2008to2010after new accounting standardscome into effect. In other words, it has updated the data.Thirdly, it distinguishes the nature of largest shareholder as governments’ basis andfurther breaks down into local, central components. And in the same time, considering areadifference, this essay divides administrative regions into east, middle and west parts in orderto easily compare difference of government subsidy.Lastly, during research of ST companies long term performance under allowance,introduce two variables-government subsidy in that year and nature of largest shareholderso as to demonstrate the impact of government financial support more accurately.Conclusion:Firstly, as a ‘save’ method, the rationality of government subsidy is still an openquestion.Secondly, as an investment, government subsidy has not achieved its expectation.