Financial effect of long-term policy equity injection: evidence from special construction funds in China

ABSTRACT

Chinese two policy banks implemented long-term equity injections for some listed companies through special construction funds from 2015 to 2016. We use the PSM-DID method to examine the effect of this equity injection on corporate financing decisions. We find that the equity injection has the financial effect of broadening corporate financing channels and optimizing debt structure, which raises the speed of capital structure adjustment and encourages corporate investment. Financing cost, financing channel, and corporate governance mechanisms can explain the financing effect of equity injection policy, showing that the signal channel plays a vital role in the equity injection policy. Companies with weak financing capabilities, such as private, small scale, weak profitability, central and western region companies, benefit more from the equity injection policy. Corporate governance capabilities significantly affect policy effectiveness. Our conclusions are robust after satisfying the assumptions and other factors that may interfere with the empirical results. We confirm the role of equity injection in reducing corporate financing costs, stabilizing investment, and encouraging long-term, high-quality development of corporations.

KEYWORDS:

• Equity injection policy
• financial effect
• corporate investment
• PSM-DID

JEL CLASSIFICATION:

• G31; G32

Disclosure statement

No potential conflict of interest was reported by the author.

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2022.2102128.

Notes

¹ Chinese steady growth policy is unexpected, and special construction funds are issued quickly. See: http://www. gov.cn/zhengce/2015-09/17/content_2933880.htm.

² The China Development Bank’s development fund is revealed: Which one in listed companies will enter the “CDB” concept stock list. See: http://fund.eastmoney.com/a/1590,20151029560340983.html.

³ Some of the corporations funded by the SCFs are unlisted corporations. The research sample in this paper selects listed corporations. There are two reasons: One is because unlisted companies do not have public financial data; The second is that there is a big difference between unlisted companies and listed companies, and there is an incomparability between unlisted companies and listed companies.

⁴ The seventh batch of special construction funds has been issued to local governments, with a scale of more than 200 billion yuan. http://money.163.com/17/0228/14/CECAM4JP002580S6.html.

⁵ Revealing the Mystery of the China Development Bank Development Fund. http://www.nbd.com.cn/articles/2015-10-29/957,273.html.

⁶ For the division of the area where the corporations are registered, we divide China into eastern, central, and western regions according to Announcement of the Fourth National Economic Census (No. 7).

Additional information

Funding

The work was supported by the National Natural Science Foundation of China [No.71873023]; National Social Science Fund of China [No.19ZDA094]