Does Stock Market Rescue Affect Investment Efficiency in the Real Sector?

To stabilize their financial markets, many governments implement a number of rescue programs. Direct purchase intervention—rarely observed in the past due to the concern of moral hazard problems and aversion to government ownership—has been commonly considered a potential way to stabilize the market. During China’s stock market crash in 2015, the government formed a national team to purchase stocks of over 1,000 firms. We investigate how this program affected investment efficiency in the real sector and show that nonfinancial firms whose stocks were purchased (i.e., rescued firms) experienced a significant decrease in investment-Q sensitivity. This result is more pronounced for firms with more opaque information environments and higher information acquisition costs. Our findings indicate that programs intended to stabilize the stock market could adversely affect nonfinancial firms’ investment efficiency