Financial effect of long-term policy equity injection: evidence from special construction funds in China

Chinese two policy banks implemented long-term equity injections for some listed companies through special construction funds from 2015 to 2016. We use the PSM-DID method to examine the effect of this equity injection on corporate financing decisions. We find that the equity injection has the financial effect of broadening corporate financing channels and optimizing debt structure, which raises the speed of capital structure adjustment and encourages corporate investment. Financing cost, financing channel, and corporate governance mechanisms can explain the financing effect of equity injection policy, showing that the signal channel plays a vital role in the equity injection policy. Companies with weak financing capabilities, such as private, small scale, weak profitability, central and western region companies, benefit more from the equity injection policy. Corporate governance capabilities significantly affect policy effectiveness. Our conclusions are robust after satisfying the assumptions and other factors that may interfere with the empirical results. We confirm the role of equity injection in reducing corporate financing costs, stabilizing investment, and encouraging long-term, high-quality development of corporations.