Indirect effects of direct subsidies: an examination of signaling effects

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.