A Study On Motivation And Policy Effect Of Government Subsidies Of Listed Companies

A growing paper has contributed to government subsidies (especiallyin China) and political connection. In transitional economy, political factors usually play a more active but important role in shaping business and intervening private sectors.This paper centers on government subsidy to listed company in A-share, examines its motivation, effects on companies’financial performance. To delve into investor’s reaction to subsidies policy, event study for the subsidiesreport from listed company has been carefullyexamined.According to my research, government subsidies are biased to political connected firmsand firms with political burden in SOE as well as in private sector. Relations to local government have more advantage in seeking for subsidies. Moreover, private firms connected to local government enhance their ability to bargaining for more subsidies on the condition that they assume political burden. Some other variables like different institutions and company characteristics also matter, but correlations are more obscure.To examine the effect of government subsidies to listed company, both short term and long term effects have been considered. For short term effect, an event study based method has been conducted. To test long term effect, financial and operation performance have been connected to subsidies.This paper first conducts event study for listed company reporting their government subsidies. Not to detect the information content of price effects, I want to judge what opinions investors hold for government subsidies. Surprisingly at first glance, investors may think this sort of intervention as insensible since CAR before and after announcement date is significantly negative except for a slight bound up in the announcement trading day. This suggests that investors worry about government subsidies.Policy effects have also been examined in the long term, ROA after subsidies increases with subsidies in private firms but decreases in SOE. Subsidies are more positive to private firms without political connections and more neutral to firms with connections. Operation performancevariables witness a more complicated variation. It seems that subsidies contribute to the growth of firms but also side effects occur that undermine internal control of firms may be undermined. Firms in different categoriesmay show differencein terms of investment and financing after granted for subsidies. Thus, we may conclude firms show difference in using government subsidies.This topic deserve to be examined for1)subsidies become more popular for government to intervene listed company which usually seen as the most dynamic and fully marketization part of China economy. Both investors and researchers take these means as confused and uncertain.This paper only probe into this inconclusive area and try to give some clues toapproaching this problem. Both policy effects and policy uncertainty need to be studied further.