Zombie companies have serious adverse effects on economic development. The relationship between government subsidies and zombie companies is a focus in China’s supply-side structural reform. In this paper, we classify companies into two categories: investment-constrained companies lacking investment opportunities, and fi nancing-constrained companies with limited sources of capital. Based on data of A-share listed companies from 2007 to 2016, this paper examines the relationship between government subsidies and the zombification of companies subject to different types of constraints. We find that more government subsidies have been allotted to investment-constrained companies than financing-constrained ones; government subsidy is one of the various factors that have contributed to company zombification, but the correlation is only significant for investment-constrained companies; financing subsidy dedicated to expanding corporate financing is more
effective in helping investment-constrained companies than government subsidies in general, but neither government subsidies nor financing subsidies are effective in preventing investment-constrained companies from turning into zombies. In the robustness test that controls the endogeneity problem of reverse causality, replaces proxy variables, lags subsidy variables and discusses the zombification of loss-making enterprises, the results are still valid. This paper provides a heterogeneous perspective to study the connection between government subsidies and the formation of zombie companies, and in view of subsidy mismatch, puts forward recommendations regarding the use of government subsidies.
Keywords: zombie company, government subsidy, financing subsidy, investment constraints, fi nancing constraints
China Finance and Economic Review
Volume 8 Number 3 Autumn 2019.P40