Do government grants increase the financial performance of benificiary firms? Evidence from Italy

MURA, ALESSANDRO;Serra M;Mulas L.

2012-01-01

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Abstract

This paper aims at demonstrating that under capital non-rationing conditions government grants related to assets do not increase the financial performance of established recipient firms; we argue that these external subsidies are unable to trigger investment projects that are more efficient than those financed via either equity or debt; further, as the amount of the grant increases, the risk of opportunistic actions is greater with consequent negative effects on firms’ performance. Using a sample of Italian manufacturing firms for the years 2002 until 2009, we compare the performances of two sub-groups (beneficiary and non beneficiary firms) that are matched in terms of geographical location, industry sector, legal form, size and amount of value added (VA). The results of a set of univariate and multivariate tests reinforce each other in showing unequivocally not only that the receipt of government grants does not increase the level of value added (VA) created, but also that the VA significantly worsens as the size of government grants increases. These findings present severe policy implications as they question the effectiveness of government grants in supporting firms.