Do high expenditures incurred in running the government benefit or hurt firms? Using Chinese data between 1999 and 2006, we find that higher administrative expenditures in provincial governments are associated with lower firm value, lower stock and financial performance, and lower labor productivity. Local governments that spend more on public administration tend to collect more fees from companies and spend less on social welfare and infrastructures. Our evidence is consistent with the “grabbing hand” hypothesis and has important policy implications.
Bibliographical noteFirth acknowledges support from a grant from the Research Grants Council of the HKSAR (LU340610). Gong acknowledges support from a grant from the Research Grants Council of the HKSAR (PolyU 5427/09H).
- Cost of government
- Firm value
- Grabbing hand
- Political economy