Work

Digital Innovation, Government Support Credibility, and Stock Returns: Evidence from China

Year: 2026

Type: preprint

Abstract: Government support can reduce innovation risk, but dependence on that support creates exposure to whether governments can credibly sustain their commitments. Using digital innovation in China, we show that digital patent intensity (DPI) predicts higher future stock returns, with the premium stronger where provincial governments emphasize digital development and face lower fiscal pressure, and weaker when policy uncertainty rises. Around the first publicly disclosed LGFV shadow-debt default in 2017, high-DPI firms underperform and subsequently experience larger increases in accounts receivable and interest expense. DPI also predicts digital subsidies and government procurement, linking innovation to government-supported cash flows. The premium is unrelated to analyst forecast errors, does not concentrate around earnings announcements, and does not reverse. Government support thus changes the source of innovation risk rather than eliminating it.

Source: SSRN Electronic Journal

DOI: 10.2139/ssrn.7431219

Authors: Yuxiang Jiang, Ruijie Liu, Cristian Ioan Tiu, Shenglong Xiang

Institutions: Southwestern University of Finance and Economics, TIAA Institute, University at Buffalo, State University of New York, Shanghai University of Finance and Economics

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Industry, innovation and infrastructure

Open Access status: green

OpenAlex ID: W7211968011

Cites: 35

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