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The literature on subsidies conceives state aids as always beneficial to the aid-receiving firm. However, the picture changes if agency problems are assumed between the managers and owners of the firm. In this case, subsidies may run counter not only to the desired result of the aid grantor but also to the interests of firm owners. Managers may divert subsidies into their own pockets, thereby deflating firm value. Copyright © 2014 John Wiley & Sons, Ltd.