Government Protection and Corporate Risk Management in China

Jianbing Huang and Hui Wang

Chinese Economy, 2009, vol. 42, issue 2, 7-29

Abstract: Corporate finance theory holds that risk management increases firm value by reducing the costs of financial distress, agency costs, and taxes. This hypothesis is examined by conducting empirical research on Chinese listed firms. Unlike previous studies, which focused mainly on the corporate governance system in China, this study pays more attention to protection within the context of local government and analyzes its effects on decisions regarding a firm's risk management. In contrast to what the theory claims, this study shows that firms with high distress costs pay little attention to risk management. Furthermore, risk-management decisions seem to have no clear impact on firm value. This phenomenon can be attributed to protection by local government, which lets very few listed firms in China go bankrupt. But in the long run, this protection will destroy a firm's competitiveness and reduce its value accordingly.

Date: 2009
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