Regional institutional quality and the signaling value of legality ratings

Purpose Drawing on signaling theory, this study investigates whether government-backed legality certifications influence firms' likelihood of experiencing high-growth episodes and the moderating role of regional institutional quality. Design/methodology/approach The empirical analysis is based on a longitudinal dataset of 115,679 privately held Italian firms, combining data from Analisi Informatizzata delle Aziende–Bureau van Dijk, the Italian Competition Authority, and the European Quality of Government Index. The observation period covers 2014–2022. Probit regression models are employed to test the hypotheses, complemented by a series of robustness checks, including propensity score matching, lagged specifications, and alternative econometric specifications. Findings The results indicate that Legality Rating (LR) adoption is positively associated with the likelihood of experiencing high-growth episodes, particularly in regions characterized by weaker institutional quality. Research limitations/implications The main limitation of this study lies in its exclusive focus on Italy, which may limit the generalizability of the findings to other contexts. Practical implications From a management perspective, the findings underscore the importance of investments to strengthen compliance systems, ethical practices, and anti-corruption mechanisms. When formally validated through state-recognized certifications (such as the Italian LR), these practices can become credible signals of corporate quality, with positive implications for business growth. Social implications Legality certifications act as credible signals of organizational quality and integrity, underscoring the strategic relevance of corporate legality and ethical behaviour in promoting firm growth and enhancing stakeholder trust, particularly in weaker institutional settings. Originality/value By extending signaling theory to government-backed legality certifications, this study highlights the role of institutionalized signals of legal compliance in fostering entrepreneurial growth. It also provides novel evidence on the interaction between corporate social responsibility and institutional environments, contributing to the literature on high-growth entrepreneurship, signaling mechanisms, and institutional contingencies.