The Signaling Effect of Government Official Visits on External Financing of Young Technology-Based Firms

The signaling literature has focused on government financial signaling, yet little attention has been paid to government nonfinancial signaling. This study develops a signaling model in which visits from government officials are viewed as nonfinancial signals to certify the legitimacy and competitive advantage of young technology-based firms, in turn positively influencing the external investors' investment decisions. Analyzing manually collected data of 1888 listed entrepreneurial firms in technology-based industries in China from 2009 to 2016, we find that the signal strength of the visits (reflected as the rank of officials) improves such firms' access to external financing, including equity and debt financing. This signaling effect is contingent upon a similar signal (such as political connection) and the signaling environment (such as institutional development). In this article, we find that the effect of the visits becomes weak for host firms with political connections and those located in institutionally developed regions. Overall, we contribute to the signaling theory literature by investigating government nonfinancial signaling, revealing that similar signals substitute each other, and incorporating the signaling environment into our signaling model.