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Local Government Debt and Firm Zombification: Evidence from China

Author

Listed:
  • Yang He

    (School of Public Finance and Taxation Central University of Finance and Economics Changping District, Beijing, 102206, China)

  • Yun Ma

    (School of Economics Fudan University Yangpu District, Shanghai, 200433, China)

  • Meng Tang

    (Antai College of Economics and Management Shanghai Jiao Tong University Xuhui District, Shanghai, 200030, China)

  • Lu Wang

    (School of Public Finance and Taxation Central University of Finance and Economics Changping District, Beijing, 102206, China)

Abstract

We analyze the effects of local government debt on the proliferation of zombie firms. With aggregated prefecture-level debt data and firm-level data from 2006 to 2013, the empirical evidence demonstrates that the local government debt significantly exacerbates the “zombification†of local firms, mainly through the credit-favoritism to state-owned enterprises and capital misallocation. Our analysis also shows that the magnitude of zombification effects is influenced by debt liquidity and the primary functions of local government financing vehicles.

Suggested Citation

  • Yang He & Yun Ma & Meng Tang & Lu Wang, 2023. "Local Government Debt and Firm Zombification: Evidence from China," Asian Economic Papers, MIT Press, vol. 22(2), pages 68-95, Summer.
    • Handle: RePEc:tpr:asiaec:v:22:y:2023:i:2:p:68-95
    DOI: 10.1162/asep_a_00865
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