Can government intervention be both a curse and a blessing? Evidence from China's finance sector

• Published in: International review of financial analysis Vol. 61; pp. 71 - 81
• Main Authors: Feng, Lingbing, Fu, Tong, Kutan, Ali M.
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.01.2019
• Subjects: Access to finance; Corruption; Government intervention; Investment climate survey; Access to finance; Corruption; O17; G21; Investment climate survey; Government intervention; C51
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2018.10.010

Earlier work views government intervention as a “grabbing hand,” whereas more recent studies report that it acts as a “helping hand.” Can government intervention be both a curse and a blessing? This paper investigates this issue by investigating the impact of government intervention on firm financing and financial corruption in China, using the 2005 World Bank Investment Climate survey data. To do so, we first use instrumental variable estimations to confirm that government intervention promotes financial access and encourage corruption. Next, we adopt a mediator model to document that government intervention promotes firms' access to finance through informal payment. The mediation effect is significant for split samples that capture different type of political and economic climate. The policy implications of the findings are discussed. •Can government intervention be both a curse and a blessing?•We examine this issue by investigating how government intervention affects firm financing and financial corruption.•We use the World Bank Investment Climate survey data collected for China in 2005.•Evidence shows that government intervention promotes firms’ financial access to capital but also forces firms to make informal payments to gain such financial access.