Effects of Government Subsidies on Investment Efficiency in Firms
Asian Tax Journal Vol. 19 No. 3 (2018), pp. 73-92
Abstract
This study analyzes the investment efficiency of firms that receive government subsidies. Government subsidies are provided to improve firms’ competitiveness and sustainability. Most of these subsidies have deadlines, after which unused funds must be returned to the government. We investigate whether government subsidies lead to inefficient investments by their recipients. Examining the financial data of listed firms for the period from 2008 to 2014, we find a positive relation between overinvestment propensity and government subsidies. In addition, the ratio of government subsidies to prior year’s tangible assets is positively associated with inefficient investments (under－ or over－investments). We assess investment efficiency based on firm size, growth, and prior year’s investments following prior studies. Our empirical results indicate that the higher ratio of government subsidies to tangible assets, the higher investment inefficiency. This study extends prior research on government subsidies by examining the impact of subsidies on corporate investment efficiency based on firms’ financial data. Korean government has distributed a significant amount of subsidies to diverse business sectors. Empirical results of this study suggest that Korean government should consider investment efficiency when allocating government subsidies.
Keywords
- government subsidies
- investment efficiency
- new technology
- new product
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