Prefecture government fiscal intervention and corporate asset allocation: The perspective of transaction cost theory

Area of Science:

• Economics
• Corporate Finance
• Public Policy

Background:

• Government fiscal intervention is a key factor influencing corporate behavior.
• Understanding its impact on asset allocation is crucial for economic development.
• Transaction cost theory provides a framework for analyzing these effects.

Purpose of the Study:

• To investigate the impact of prefecture-level government fiscal intervention on corporate asset allocation in China.
• To explore the underlying mechanisms and heterogeneity of this impact.

Main Methods:

• Utilized a panel dataset of Chinese listed firms from 2008 to 2023.
• Applied econometric analysis to examine the relationship between fiscal intervention and asset allocation.
• Conducted mechanism and heterogeneity analyses to understand the drivers and variations in the effects.

Main Results:

• Increased fiscal intervention led to a significant decrease in operating asset allocation and an increase in financial asset holdings.
• Fiscal intervention was found to raise regional transaction costs, discouraging productive investment.
• The effects were more pronounced for private firms and those heavily reliant on local economies.

Conclusions:

• Government fiscal intervention in China creates a substitution effect in corporate asset allocation, favoring financial over operating assets.
• This intervention increases transaction costs, negatively impacting real-sector investment.
• Policy implications include enhancing fiscal efficiency and promoting genuine economic development.