Subsidizing Failing Firms: Evidence from Chinese Restaurants
57 Pages Posted: 15 Sep 2020 Last revised: 14 Sep 2023
Date Written: July 20, 2023
Abstract
Using data on nearly 20,000 restaurants in China during the Covid-19 outbreak, we find evidence that the government-sponsored rent reduction program reduced debt overhang problems. Rent reductions, which averaged 36,000 RMB per restaurant, increase the open rate of restaurants by 3.7%, revenue by 11,000 RMB, and the number of employees by 0.36. Larger restaurants with higher committed costs benefit more from the rent reduction. The stimulus has a positive spillover effect that boosts the revenue of restaurants in the immediate vicinity of subsidized restaurants. The treatment effect varies with organizational structure in a manner consistent with an information frictions hypothesis.
Keywords: Rent reduction, COVID-19, debt overhang, organizational structure, restaurant chains
JEL Classification: D23, D40, E62, G32, J21
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