The signaling effect of entrepreneurship subsidies on initial public offering investor valuation: An anticorruption campaign as a quasi-natural experiment

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.