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Indirect effects of direct subsidies: an examination of signaling effects

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  • Jun Li
  • Ruby P. Lee
  • Junbao Wan

Abstract

This study draws on signalling theory to investigate how government funded research and development (R&D) subsidies influence corporate external financing through their direct and indirect impacts. Analysing data from 469 listed companies in China’s high-tech industries from 2009 to 2016 and after controlling for potential endogenous concerns, the authors find that R&D subsidies have positive effects on corporate short-term debt financing and equity financing but no effects on long-term debt financing. More importantly, their empirical evidence suggests that R&D subsidies serve as an important signalling mechanism to reduce information asymmetry, which in turn affect different types of corporate external financing. These findings contribute to the literature by demonstrating how R&D subsidies serve as market signals to attract external financing, offering important implications to academia, practitioners, and policy makers.

Suggested Citation

  • Jun Li & Ruby P. Lee & Junbao Wan, 2020. "Indirect effects of direct subsidies: an examination of signaling effects," Industry and Innovation, Taylor & Francis Journals, vol. 27(9), pages 1040-1061, October.
    • Handle: RePEc:taf:indinn:v:27:y:2020:i:9:p:1040-1061
    DOI: 10.1080/13662716.2019.1685375
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    Cited by:

    1. Qi‐an Chen & Shuxiang Tang & Yuan Xu, 2022. "Do government subsidies and financing constraints play a dominant role in the effect of state ownership on corporate innovation? Evidence from China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3698-3714, December.
    2. Junbing Xu & Yuanyuan Li & Dawei Feng & Zhouyi Wu & Yang He, 2021. "Crowding in or crowding out? How local government debt influences corporate innovation for China," PLOS ONE, Public Library of Science, vol. 16(11), pages 1-20, November.
    3. Zhao, Shikuan & Abbassi, Wajih & Hunjra, Ahmed Imran & Zhang, Han, 2024. "How do government R&D subsidies affect corporate green innovation choices? Perspectives from strategic and substantive innovation," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1378-1396.
    4. Bellucci, Andrea & Pennacchio, Luca & Zazzaro, Alberto, 2023. "Debt financing of SMEs: The certification role of R&D Subsidies," International Review of Financial Analysis, Elsevier, vol. 90(C).

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