Government Subsidies and the Cost of Bank Loans

Abstract

This study analyzes the relationship between government subsidies and the cost of bank loans for listed firms in the United States. Utilizing a novel dataset on firm-specific subsidies, I find a negative association between receiving a subsidy and loan spreads that is both statistically and economically significant. The negative association is more pronounced for borrowers with higher levels of default and information risk. I also find that the receipt of subsidies is associated with lower future credit risk. When borrowers are subject to greater economic policy uncertainty and product market competition, the negative correlation between subsidies and loan spreads is less significant. Additional analysis reveals the relationship between subsidies and loan spreads is dominated by tax subsidies rather than non-tax subsidies. Finally, subsidized firms have fewer financial loan covenants and more lenders than unsubsidized firms. Overall, this study provides new evidence of the benefits of government subsidies in terms of lowering bank loan costs.

Date of Award	21 Aug 2024
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Yangyang CHEN (Supervisor) & Min ZHANG (External Supervisor)