Government subsidy and firms at a high risk of delisting evidence from China

Abstract

This paper examines who receives direct government subsidy when a firm faces delisting risk and how such subsidy affects a firm’s market valuation, profitability, and labor intensity. I find that subsidies are more likely to be granted to firms that have high risk of delisting, political connections and big size, regardless whether they are state owned or private. Even for state-owned enterprises, having political connections are twice as likely to receive subsidy than non-connected state firms. I also find that the receipt of a subsidy is not only endogenously related to the characteristics of recipients, but also increases firm value and profitability and significantly reduces its employment. The subsidized firms have better profitability and lower labour intensity than unsubsidized firms. Our results imply that it is with whom the firm has connections (i.e., political connections) that matters in the receipt of capital allocation when confronting delisting risk, not what it is (i.e., state owned).