Unveiling the hidden risks of government subsidy reliance: evidence from stock price crashes

We develop a novel index to quantify the extent to which firms’ key operations–such as investment, efficiency, innovation, and liquidity–depend on government subsidies. Using data from Chinese listed firms (2007-2021), we find that a 1% increase in this index is associated with a 2.6% rise in ex-post stock price crash risk, except for subsidies in the form of tax rebates. To address endogeneity, we employ a DID approach leveraging China’s anti-corruption campaignand an IV approach using proximity to subsidy offices and city-level fiscal capacity as instruments. The effect is stronger in financially constrained firms and those with lower institutional holdings. Robustness checks confirm these findings. Channel analysis identifies information disclosure quality and operational risk intensity as key mechanisms. Our results highlight hidden risks of government subsidies for stock price stability, offering practical insights for managers of subsidy-dependent firms and policymakers.