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The signaling role of government subsidies: Ambiguity reduction and corporate innovation in China

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  • Luo, Le
  • Wang, Junhao

Abstract

We introduce a novel mechanism: subsidies act as a potent signal of government endorsement, reducing firm-level ambiguity (Knightian uncertainty) about innovation projects. Using 231,828 firm-quarter observations from Chinese A-share companies (2000–2023), we find that subsidy receipt significantly lowers contemporaneous ambiguity. This ambiguity reduction mediates the positive relationship between subsidies and R&D investment. Critically, the effect is substantially stronger for non-state-owned enterprises (Non-SOEs), for whom the government’s signal provides greater informational value. While the effect remains statistically significant for state-owned enterprises (SOEs), the magnitude is considerably smaller, consistent with their already privileged institutional position. Our findings highlight the crucial, yet underappreciated, informational role of industrial policy in transition economies, demonstrating that reducing uncertainty can be as vital as providing capital for stimulating private sector innovation.

Suggested Citation

  • Luo, Le & Wang, Junhao, 2025. "The signaling role of government subsidies: Ambiguity reduction and corporate innovation in China," Finance Research Letters, Elsevier, vol. 85(PB).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pb:s1544612325012279
    DOI: 10.1016/j.frl.2025.107969
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    References listed on IDEAS

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    Cited by:

    1. Han, Zhen & Luo, Erga & Xiong, Xuezhen & Li, Jinkai, 2026. "Government innovation subsidies and enterprise digital transformation: Evidence from Chinese listed companies," Technology in Society, Elsevier, vol. 84(C).

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    Keywords

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    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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