More is better? The nonlinear effect of government subsidies on corporate debt default risk

Preventing and resolving corporate debt default risk is essential for promoting sustainable development and avoiding triggering macro systemic financial risks. Based on the data of non-financial listed firms in China’s Shanghai and Shenzhen A-shares, this study empirically tests the influence and mechanism of government subsidies on corporate debt default risk. (1) It is found that there is a U-shaped relationship between government subsidies and corporate debt default risk, indicating the nonlinear effect. Specifically, moderate subsidies can reduce corporate debt default risk, whereas excessive subsidies increase this risk. (2) The mechanism tests reveal that moderate subsidies can alleviate corporate financing constraints and enhance competitiveness, thus lowering corporate debt default risk. In contrast, corporate agency problems, such as rent-seeking and inefficient investment, may explain why excessive subsidies increase corporate debt default risk. (3) Heterogeneity analyses suggest that the nonlinear relationship between government subsidies and corporate debt default risk is more pronounced among firms that are non-state-owned, exhibit weaker internal controls, belong to strategic emerging industries, or are located in regions with lower local government fiscal pressure. This study offers new theoretical insights and empirical evidence for optimizing the subsidy policy and preventing corporate debt default risk.