Getting a government tax subsidy can actually make it more expensive for a company to get a loan from a regular bank.
SSRN · March 18, 2026 · 6431438
The Takeaway
While we usually think of government subsidies as pure financial help that makes a company safer, this study reveals that tax-based subsidies are often associated with higher interest rates on debt. Lenders appear to view these specific types of subsidies as signals of financial risk or instability, contradicting the intended goal of the government assistance.
From the abstract
We use a comprehensive database of local, state, and federal subsidies to study the impact of government subsidies on firms' cost of debt from 2001 to 2022. Traditional tests indicate that non-tax-based subsidies lower borrowing costs. Yet our quantile distributional evidence reveals substantial heterogeneity: tax-based subsidies are associated with higher debt costs with varying magnitudes based on firm credit profiles. When accounting for cross-industry heterogeneity, the significance of