Do subsidy allocation decisions conform to Q theory? Evidence from China

This study investigates the Chinese government's subsidy allocations to domestic public companies, focusing on the economic versus political motives behind these decisions. Using two-way fixed effects regression models with firm-level annual subsidy data from 2008 to 2023, we find distinct subsidy allocation patterns based on Tobin's Q values. Firms with Q values above 1 receive subsidies driven by economic motives, with the government favouring those with higher market value efficiency. In contrast, firms with Q values below 1 are more likely to receive subsidies motivated by political considerations, particularly supporting weaker performers. Robustness checks confirm our findings, including two-stage least squares, difference-in-differences regressions with policy shocks, and cross-sectional analyses. Additionally, subsidies allocated to firms with higher Tobin's Q values enhance their investment efficiency, particularly benefiting non-state-owned enterprises and those operating in market-oriented regions. A regression discontinuity design reveals that subsidies to underperforming state-owned enterprises are politically motivated. This study reconciles inconsistencies in prior research regarding the relationship between investment efficiency and subsidy allocation, providing new insights into government subsidy strategies.