The “heterogeneous” effect of government grants on bank lending

Abstract

This study aims to test whether banks can recognize different signals from different types of government grants received by their clients and respond differently. Using a novel panel data set from China, we construct a three-way fixed-effect regression model and empirically explore the effect of government grants received by banks’ clients on banks’ lending decisions. We find that banks have heterogeneous attitudes towards their clients when the clients receive different types of government grants. In particular, we discover that banks behave positively toward clients who receive "development supportive" grants but negatively toward clients who receive "helping hand" grants. The main results hold after a series of robustness tests. Our study offers fresh perceptions on how banks see government grants of their clients while making lending choices. Our finds will offer certain inspirations for government grant policies and bank lending decisions.