Government Assistance: A Growing, Underdisclosed Financing Source

We examine whether, and to what extent, government economic assistance is associated with future firm leverage. We use novel data from public records to provide evidence on a distinct impact of government assistance on firm capital structure. Using a two-stage selection model and entropy balancing, we find that both the receipt and magnitude of government assistance are strongly associated with lower future measures of leverage. Further, we find only direct government assistance, such as cash grants, but not tax relief or loans is negatively associated with firm leverage. Also, we show government assistance often creates corporate obligations, but commonly, neither the assistance nor the obligations are disclosed under the new Financial Accounting Standards Board (FASB) Standard ASU 2021-10 that mandates disclosure of government assistance. JEL Classifications: H81; M41; M48.