Are government subsidies or preferential listing policies better for the market performance of tech firms? Evidence from Korea

ABSTRACT

Tech firms are growth engines in modern economies. We examine which policies, government subsidies or preferential listing, work better for tech firms’ performance. We test whether Korean tech firms outperform control firms using key market-based performance metrics. Tech firms benefiting from Korea’s preferential listing system outperform control firms in funding, patent creation, and market capitalization but underperform in IPO-day returns. In contrast, government subsidies do not affect market performance other than six-month returns from the IPO date. These findings indicate that preferential listing policies are better than government subsidies for the market performance of tech firms.

KEYWORDS:

• Funding performance
• government subsidies
• market performance
• preferential listing system
• tech firms
• technology performance
• Korea

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Rent sharing refers to corruptive collusion between the state and the chaebol family in order to achieve economic development and simultaneously to share the rent (Oh, Yoon, and Kim 2022). Likewise, a rent sharing issue is likely to occur in the allocation of government subsidies.

2. As of 31 December 2021, only 22 agents can perform the technology evaluation services, consisting of 16 government agents and six TCB (Tech Credit Bureau) firms.

3. We did not test differences in financial performance, such as asset turnover ratio (sales/average total assets) and profitability (return on assets, return on sales, or return on equity), because some tech firms had not generated sales, let alone profits by the IPO year. Also, they would have inferior financial performance by construction. So, our paper is distinctively different from the prior literature that investigates the impact of government subsidies on financial performance.

4. All the variables, except for Patents and Employees, are measured at the specific dates or period like IPO date and pre-IPO period. Patents and Employees are not periodically updated in the financial statements or financial press. So, we collect the data for them whenever they are available. Since both variables are not subject to change in a short period of time, they would not distort our results.

5. The finding is inconsistent with the finding from the mean difference tests, which show the opposite result when we do not control for the effects of our control variables. Once again, the regression analyses reveal more accurately tech firms’ relative performance in terms of IPO funding than the difference tests.

6. We also run the regressions using the cumulative government subsidies standardized by the IPO year average total assets. The results are indistinguishable from the regressions using the cumulative subsidies divided by cumulative sales revenue in the pre-IPO periods.

Additional information

Notes on contributors

Soon Suk Yoon

Soon Suk Yoon is a Professor of Accounting at the School of Accounting, Finance, Economics, and Decision Sciences at Western Illinois University, USA. His teaching and research interests include financial accounting and finance. He has published numerous books, and more than 50 journal articles over the last 36 years.

Hyo Jin Kim

Hyo Jin Kim is a Professor of Accounting and Tax at Jeonju University, Jeonju, Korea. Her teaching and research interests include financial accounting and tax accounting. She has published three books and over 30 journal articles over the last 16 years.