Journal of Business & Economic Policy

Anomalous Financing Choices with the Change of Industrial Policy: The Case of Taiwan
Li-Han Kao, Chih-Young Hung

Abstract
This paper examines whether firms’ financing choices are anomalously affected by the change of institutional environment. From the data of Taiwanese listed firms, the estimated results indicate that policy incentives for R&D investment and facility procurement affect firms’ financing choices diversely in industries. Besides, firms decide appropriate leverage level depending on the incentives and benefits they can obtain from different policy periods. Specifically, change of the institutional environment causes firms to make active financing decisions that may distort firm value. To reduce risk of market and systemic failure, we suggest that government should consider curtailing disproportionate subsidies or incentives as a way to avert excessive intervention. On the other hand, firms should measure the pros and cons of obtaining benefits of policy incentives and avoid changing their decided financing strategy that may be more a loss than gain in the long run.

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