The paper sidesteps the broader issue of whether or not subsidies are a good or bad thing but gets into whether or not there’s information in their granting that researchers can use?
Yiyuan (Ian) Sun, from the School of Management at the Jinan University (et al.) took a close look at Chinese listed companies from 2007~2016 which comprise a useful dataset because Chinese companies must report government subsidies as a line item. Moreover, a lot get them.
U.S. companies are not required to do this which makes the tracking of subsidy-effect there harder. Chinese companies must also report details of the subsidy, critically whether it’s a tax or non-tax related benefit.
What the researchers found was a clear relationship between subsidies and sell-side analyst forecast accuracy, which as a researcher or investor, is a very useful thing to know; but why should this be so?
There seem to be three factors at work:
- A company in receipt of a government subsidy is required to be more transparent. Not only to justify the payments to society as a whole but to give political comfort to the grantors of the cash.
- If funding isn’t so reliant on capricious bankers or fickle capital markets managers have less reason to want to manage earnings. Greater fidelity in reporting is thus encouraged.
- The granting of a subsidy is no small thing for politicians. They’re more likely to give these to enterprises they judge as responsible stewards of the funds which will usually be ‘good’ companies who report accurately.
A final handy-hack, the work notes non-tax related subsidies have a more reliable effect on forecast accuracy.
You can review the paper in full via this link Do Government Subsidies Affect Analyst Forecast Accuracy?
Happy Sunday