Real Effects of Government Subsidy Accounting Changes: Evidence from a Natural Experiment
Dr. Wei SHI
Senior Lecturer (Equivalent to Associate Professor)
Deakin University
Date: 12 August 2024 (Monday)
Time: 10:00 am – 11:30 am
Venue: E22-G015
Host: Prof. Feng TANG, Assistant Professor in Accounting
Abstract
We examine the real effects of the unique regulatory reform in China, i.e., the 2017 change in accounting rules related to the recognition of government subsidies in firms’ income statements. Before the rule change, firms could only recognize government subsidies below the line of operating income. After the rule change, firms can choose to recognize government subsidies either above or below the line of operating income, and many firms now recognize income-related government subsidies as part of operating income. The setting essentially represents a late adoption of International Financial Reporting Standard (IFRS) on government subsidy, facilitating causal inference of changes in IFRS. Our results show that firms receiving more government subsidies prior to the regulatory change (“treated” firms) experience a significant increase in investment but suffer from lower investment efficiency compared to firms receiving fewer government subsidies (“control” firms). Further analysis reveals that treated firms experience a significant increase in equity misvaluation post-regulatory change, which contributes to the rise in investment and the decline in investment efficiency. The learning and contracting channels are unlikely to account for these observed real effects. Our findings highlight the unintended consequences of accounting changes related to government subsidy recognition.
Speaker
Dr. Wei SHI has a board teaching and research interest in accounting, including ESG, regulation and valuation. He has a diverse working experience across Asia, Europe and North America. Dr. Wei SHI obtained his doctoral degree in accounting from Hong Kong University of Science and Technology in 2014. Before joining Deakin, he was an assistant professor in Norwegian School of Economics (NHH). He was a visiting scholar in Rotman School of Management, University of Toronto during January – June 2018. His research interests center on the information flow in the capital market and its implications for firm policy, as well as the economic consequence of regulation. He has published papers in prestigious journals such as Journal of Accounting Research, Auditing: A Journal of Practice and Theory, and Journal of Management Accounting Research.
All are welcome!
