Associate Professor Xin Xia , a researcher of the Base, has published a paper titled “Optimal investment and financing with government subsidies under time to build” in Economic Modelling.

Abstract:This paper develops a real-options model that incorporates the game-theoretic interaction between firms and the government. We examine how government subsidies influence a firm’s optimal investment and financing decisions when accounting for time-to-build delays. Our findings indicate that subsidies induce leveraged firms to accelerate investment, albeit with a smaller investment scale and more conservative debt financing. Additionally, despite receiving fewer subsidies, leveraged firms tend to invest both earlier and at a larger scale than unleveraged firms. Furthermore, as subsidies become more effective at reducing time to build, investment is accelerated, leverage declines, and the optimal investment scale exhibits a U-shaped pattern. Lastly, compared to non-negotiated debt, the effect of negotiated-debt financing on optimal subsidies and investment scale depends on shareholders’ bargaining power. Our model offers novel and practical insights for policymakers designing effective subsidy programs and for managers formulating sound business strategies.

Keywords: Government subsidies; Investment decisions; Time to build; Debt financing

Link: https://erj.ajcass.com/#/issue?id=122073&year=2025&issue=12

Author profile

Xin Xia is a Associate Professor at the School of Finance, Zhongnan University of Economics and Law, with a primary research focus on corporate finance. Over the past few years, he has published more than 10 papers as the first author or sole corresponding author in academic journals including Journal of Management Sciences, Chinese Journal of Management Science, Journal of Corporate Finance, International Review of Economics and Finance, North American Journal of Economics and Finance, Economic Modelling, Applied Economics, and Economics Letters. He also serves as a reviewer for several SSCI journals. His research achievements have been funded by the Contemporary Economics Doctoral Innovation Program.