The Impact of Subsidies on Firm Behavior

This study investigates how government subsidies shape firm behavior, with a focus on financial performance, strategic decisions, and executive compensation. Firstly, we examine the impact of subsidies on firm profitability, investment, and employment in U.S. firms from 2000 to 2022 using a comprehensive dataset that matches local, state, and federal subsidies with firm-level financial information. Results show that subsidies generally improve firm outcomes, particularly when they are cost-reducing and aligned with firms’ strategic commitments. Secondly, we analyze the relationship between subsidy receipt and CEO compensation. Our findings reveal that non-debt-related subsidies are positively associated with CEO pay, especially for first-time recipients and firms receiving large subsidies. Together, these studies highlight the nuanced effects of government support, suggesting that subsidies not only influence operational outcomes but also executive incentives. The findings contribute to ongoing debates in corporate finance and public policy, emphasizing the importance of tailoring subsidy programs to firm characteristics and governance considerations.