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

Abstract

AbstractResearch SummaryThis 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 SummaryDo 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.