TY - JOUR
T1 - The signaling effect of entrepreneurship subsidies on initial public offering investor valuation
T2 - An anticorruption campaign as a quasi-natural experiment
AU - Chen, Jin
AU - Lu, Qian
AU - Heng, Cheng Suang
AU - Tan, Bernard C.Y.
N1 - Funding Information:
The authors thank Co‐Editor Peter Klein and the two anonymous reviewers for their extremely constructive suggestions throughout the review process. The authors are also grateful to Yi Ding for her valuable comments on DID analysis. Jin Chen acknowledges support from the National Natural Science Foundation of China (NSFC; grant numbers: 71772061 and 71302041). Qian Lu acknowledges support from the NSFC (grant numbers: 71632005 and 71602086). 1
Publisher Copyright:
© 2023 Strategic Management Society.
PY - 2023/3/23
Y1 - 2023/3/23
N2 - Research Summary: This study examines whether different entrepreneurship subsidies signal initial public offering (IPO) firms' quality to external investors. We employ a quasi-natural experiment by exploiting the exogenous, staggered introduction of “Eight-Point Code” inspections to Chinese provinces, which anticorruption campaign impacts how subsidies match firm quality. Based on a difference-in-differences analysis of 584 IPOs, we find that research and development (R&D) subsidies match highly innovative firms regardless of government corruption, but investors interpret R&D subsidies as a quality signal only when government corruption is low. High-growth subsidies match high-growth firms only when government corruption is low; however, investors do not interpret high-growth subsidies as a quality signal regardless of government corruption. Our study contributes by examining subsidy–firm matching and investors' interpretations to isolate the signaling effect of entrepreneurship subsidies. Managerial Summary: Do initial public offering (IPO) investors interpret different entrepreneurship subsidies as signals of entrepreneurial firms' quality? We find that when government corruption is high, research and development (R&D) subsidies are matched to high-quality firms, but high-growth (HG) subsidies are not; nevertheless, because of dubious subsidy–firm matching under high corruption, neither R&D nor HG subsidies signal firm quality to IPO investors. When government corruption is low, both R&D and HG subsidies are matched to high-quality firms; however, because of the distinct nature of innovation and growth, IPO investors interpret only R&D subsidies as a signal of quality, ignoring HG subsidies. Our findings suggest that investors' interpretations of entrepreneurship subsidies depend on subsidy type as well as subsidy–firm matching under different anticorruption regulations.
AB - Research Summary: This study examines whether different entrepreneurship subsidies signal initial public offering (IPO) firms' quality to external investors. We employ a quasi-natural experiment by exploiting the exogenous, staggered introduction of “Eight-Point Code” inspections to Chinese provinces, which anticorruption campaign impacts how subsidies match firm quality. Based on a difference-in-differences analysis of 584 IPOs, we find that research and development (R&D) subsidies match highly innovative firms regardless of government corruption, but investors interpret R&D subsidies as a quality signal only when government corruption is low. High-growth subsidies match high-growth firms only when government corruption is low; however, investors do not interpret high-growth subsidies as a quality signal regardless of government corruption. Our study contributes by examining subsidy–firm matching and investors' interpretations to isolate the signaling effect of entrepreneurship subsidies. Managerial Summary: Do initial public offering (IPO) investors interpret different entrepreneurship subsidies as signals of entrepreneurial firms' quality? We find that when government corruption is high, research and development (R&D) subsidies are matched to high-quality firms, but high-growth (HG) subsidies are not; nevertheless, because of dubious subsidy–firm matching under high corruption, neither R&D nor HG subsidies signal firm quality to IPO investors. When government corruption is low, both R&D and HG subsidies are matched to high-quality firms; however, because of the distinct nature of innovation and growth, IPO investors interpret only R&D subsidies as a signal of quality, ignoring HG subsidies. Our findings suggest that investors' interpretations of entrepreneurship subsidies depend on subsidy type as well as subsidy–firm matching under different anticorruption regulations.
KW - anticorruption
KW - high-growth subsidies
KW - initial public offering
KW - R&D subsidies
KW - signaling
UR - http://www.scopus.com/inward/record.url?scp=85150954971&partnerID=8YFLogxK
U2 - 10.1002/sej.1460
DO - 10.1002/sej.1460
M3 - Article
AN - SCOPUS:85150954971
SN - 1932-4391
VL - 17
SP - 633
EP - 670
JO - Strategic Entrepreneurship Journal
JF - Strategic Entrepreneurship Journal
IS - 3
ER -
