The ripple effect: How subsidies transform firm behavior

José Antonio Pérez-Amuedo, M. Kabir Hassan and Reza Houston

Journal of Corporate Finance, 2025, vol. 95, issue C

Abstract: This study examines how government support influences firm behavior across profitability, investment, and employment. Using a comprehensive database linking local, state, and federal subsidies to firm-level financial data, we assess how different subsidy types shape firm decisions. We find that cost-reducing subsidies are more effective than revenue-increasing ones in boosting profitability, employment, and strategic investment. Firms that commit to hiring or capital investment upon receiving subsidies achieve superior outcomes. These findings highlight the importance of aligning subsidy design with firm-level incentives and broader economic goals.

Keywords: Subsidies; agency costs; loans; firm performance (search for similar items in EconPapers)
JEL-codes: G18 G38 H21 H25 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:95:y:2025:i:c:s0929119925001488

DOI: 10.1016/j.jcorpfin.2025.102880

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