when public funding meets private incentives: Government subsidies and corporate investment

Government subsidies shape not only the scale of corporate investment but also its allocation across investment categories. Using a matched sample of U.S.-listed firms, we find that subsidized firms invest more aggressively than comparable unsubsidized firms, with the increase concentrated in R&D and acquisitions – two discretionary and agency-prone activities – rather than capital expenditures. Subsidy-related acquisitions elicit less favorable market reactions and lower subsequent firm valuation. Further tests reveal an asymmetric effect: subsidies alleviate underinvestment but also increase the likelihood of overinvestment. These investment-expanding and overinvestment effects are more pronounced for state-level subsidies awarded before gubernatorial elections, consistent with heightened electoral incentives influencing firms' investment decisions. Finally, the positive subsidy–investment relationship is weaker among financially constrained firms and those subject to stronger governance, regulatory oversight, and market discipline.