The certification effect of R&D subsidies from the central and local governments: evidence from China

This paper explores whether the certification effect of R&D subsidies exists in China, a typical transition economy, and how subsidies from different sources present distinct signals to external investors. Using the sample of Chinese listed companies and a multivariate regression model, our results suggest that R&D subsidies from the central government send a negative signal about the quality of R&D projects and worsen the access of subsidized firms to external capital. In contrast, subsidies from local governments serve as a positive signal and the access is eased. We contribute to the studies of the certification effect by taking the distinct incentives of different government agencies in China into account and by investigating the relevance of such incentives to the diverse types of signal. The implications of our findings and related directions for future research are further discussed.