Corporate finance policies, subsidies and R&D: Evidence from China

This paper develops an agency theory based conceptual framework to investigate the interconnections among corporate finance policies, subsidies and R&D investment. We empirically test our predictions using a sample of listed high-tech firms from China during 2007-2015. Our baseline results support a positive subsidies-R&D relationship. Subsequent tests using non-linear models further point out that this relationship is inverted U-shaped. In line with our conceptual framework, we show that the marginal effect of subsidies is diminishing and turns negative particularly among firms with higher dividend payout, lower investment efficiency, and lesser cashflow constraints. These findings ascertain the importance of internal corporate governance structure in facilitating regulatory policy implementation and effectiveness.