R&D subsidies and firms’ cost of debt

Financing research and development (R&D) through loans is usually a costly endeavor. Information asymmetry, outcome uncertainty and low collateral value tend to increase the cost of debt. Based on a large panel of heterogeneous firms, this study shows that recipients of public R&D grants, on average, face lower costs of debt. The findings also suggest that a process of certification in which the subsidy signals the quality of the firm’s R&D to external lenders rather than a ‘resource effect’, i.e. the direct liquidity impact of the subsidy, explains this observation. The comparison between young and established firms shows that the certification effect for young firms primarily stems from subsidies for basic research, that is, for the stage of R&D in which outcome uncertainty and information asymmetries are typically larger. In addition, young firms seem to benefit from a ‘formation effect’ through learning from the subsidy application process. Application experience may improve young firms’ R&D project plans in a way that reduces information asymmetries between firms and lenders.