Effect of innovation disclosure in annual reports on R&D subsidies in China

Abstract

Purpose

We examine the effectiveness of signaling by disclosing innovation in annual reports in terms of securing R&D subsidies, using a novel text-based measure of firm-level innovation intensity.

Design/methodology/approach

The empirical analysis includes regressions with firm and year-fixed effects and an instrumental variable approach. Both mediation and moderation analysis are conducted to identify the plausible channels.

Findings

We find that firms are likely to receive research and development (R&D) subsidies if their annual reports contain intensive disclosure of information about innovation. We also identify the site visits by government officials as a plausible channel through which innovation disclosure in annual reports can help firms receive R&D subsidies. Additional analysis shows the main effect of innovation disclosure is especially pronounced in firms with severe information asymmetry and those facing a low-trust environment.

Originality/value

Current studies have shown the effectiveness of signaling in capital markets in terms of securing bank loans and venture capital (Cassar et al., 2015; Hoenig and Henkel, 2015; Connelly et al., 2016; Plummer et al., 2016). It is unclear if such a signaling can attract the attention of government officials. Our results suggest that government officials view annual reports as an important means of mitigating information asymmetry, which in turn helps firms to receive external R&D funding.

Citation

Zhou, W., Pan, X. and Wu, Y. (2024), "Effect of innovation disclosure in annual reports on R&D subsidies in China", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-12-2023-0211