Local government consumption and firm performance. Evidence from the 'TPCs' in China

Government consumption is an important factor affecting corporate performance. By exploiting a unique data set that reveals the Three Public Consumptions (TPCs) of China's prefecture-level city governments, this paper investigates the impact of actual local government consumption on corporate performance and identifies the potential impact mechanism. We show that increases in local government consumption did lead to declines in firm productivity. TPC expenditures on official cars and official receptions had the most obvious impact on corporate performance. After considering endogenous measurement errors and substitution variables, the conclusion remained stable. Moreover, we show that the increase of local government TPC expenditures caused an increase in corporate tax burden, a decline in government efficiency, and excessive administrative intervention, which in turn caused a decline in firm performance. Our findings are particularly pronounced in non-state-owned enterprises, in firms with tight financing constraints, and in regions with weak marketization and low budget transparency. This study expands the theory that government behavior affects corporate performance, and also provides policy implications regarding restraints on government consumption.

Automated summary

This paper examines the impact of local government consumption on corporate performance in China, specifically focusing on the Three Public Consumptions (TPCs) of prefecture-level city governments. The study finds that increased government consumption leads to declines in firm productivity, with expenditures on official cars and official receptions having the most significant impact. This increase in government consumption also results in higher corporate tax burden, decreased government efficiency, excessive administrative intervention, and ultimately a decline in firm performance. These findings are particularly pronounced in non-state-owned enterprises, firms with limited financing, and regions with weak marketization and low budget transparency.