Empirical studies of the impact of government policies on corporate finance

Abstract

Recently, countries have been striving to improve their national and industrial competitiveness through a series of policy initiatives. In particular, the uncertainty in global economic policies has reached the pinnacle due to Brexit and the trade friction between the United States and China. Thus, it is inevitable that the operation and performance of firms are affected by government policies. This study examined the impact of government policies on firms through two modes of research. First, this study examined the effect of government policy announcements on firm value. The Chinese government announced numerous policies starting from 2017 to lead the competitiveness for next generation communication technology. This study examined these policies’ effect on the stock returns of Chinese telecommunication firms. This is a reasonable hypothesis since government policies have great impacts on firms in China. The experimental results show that government policies statistically significantly affect firm stock returns. Specifically, the local government policy announcements containing specific development plans show a more prominent impact. Second, the impact of firm-level political risk (FLPR) on the cash policy of firms was also examined. When FLPR is high, firms reduce operational activities such as investment and employment and increase their expenses on government lobbying activities. Therefore, the market assessments of a firm’s cash policy and the cash value during this period are not transparent. The results of this study found that FLPR has a statistically significant effect on excess cash holdings (the portion of which exceeds the requirement for normal operation) and cash value. It was also found that the characteristics of firm managers have a statistically significant moderating effect on these relations.