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Fiscal decentralization and corporate investment: empirical evidence from China

Shenghao Gao, Liming Wang, Ningyue Liu and Min Zhang

Journal of Economic Policy Reform, 2019, vol. 22, issue 1, 51-68

Abstract: This paper examines the effect of fiscal decentralization on levels and efficiency of corporate investment. The results indicate that as the extent of local government fiscal decentralization increases, the level of new investment by firms under their jurisdiction rises. Furthermore, fiscal decentralization has an impact on corporate investment by aggravating over-investment rather than alleviating under-investment, leading to a situation whereby fiscal decentralization is negatively associated with investment efficiency at the level of the firm. Finally, the impact of fiscal decentralization on over-investment, under-investment and investment efficiency is not different between state-owned enterprises and non-state-owned enterprises, suggesting that economic leverages are the dominant government intervention measures. The findings imply that fiscal decentralization is another determinant of firm-level investment and corporate investment efficiency, which broadens the existing literature on the economic consequence of fiscal decentralization, resulting in important implications for policy-making.

Date: 2019
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DOI: 10.1080/17487870.2017.1310042

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