IDEAS home Printed from https://ideas.repec.org/a/bla/ecopol/v38y2026i2p575-597.html

Does Long‐Term Local Government Debt Destabilize Corporate Stock Prices? Empirical Evidence From China

Author

Listed:
  • Wanting Zhang
  • Ning Ding
  • Shidi Dong
  • Hong Yue

Abstract

The paper investigates how the maturity structure of local government debt influences corporate financial stability. Using a matched panel data set of Chinese A‐share listed firms between 2009 and 2023, we document that a shift toward longer public debt maturity substantially raises corporate stock price crash risk. This effect operates through three channels that induce corporate maturity mismatch, lower investment efficiency, and increase default risk. We further show that structural monetary policy can mitigate the adverse consequences, while debt issuance intensity exhibits a nonlinear threshold. These findings identify a significant microtransmission mechanism through which local government debt maturity decisions amplify financial fragility.

Suggested Citation

  • Wanting Zhang & Ning Ding & Shidi Dong & Hong Yue, 2026. "Does Long‐Term Local Government Debt Destabilize Corporate Stock Prices? Empirical Evidence From China," Economics and Politics, Wiley Blackwell, vol. 38(2), pages 575-597, July.
    • Handle: RePEc:bla:ecopol:v:38:y:2026:i:2:p:575-597
    DOI: 10.1111/ecpo.70041
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ecpo.70041
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ecpo.70041?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Yanyin Li & Yuan George Shan & Rong Xu & Xingmei Xu & Yize Xu, 2025. "Anticorruption and Capital Market Pricing Efficiency: Evidence From China," Economics and Politics, Wiley Blackwell, vol. 37(3), pages 1157-1178, November.
    2. Lugo, Stefano & Piccillo, Giulia, 2019. "The Relation between Corporate and Government Debt Maturity in Europe," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(5), pages 2119-2140, October.
    3. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2001. "Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices," Journal of Financial Economics, Elsevier, vol. 61(3), pages 345-381, September.
    4. Andreou, Christoforos K. & Andreou, Panayiotis C. & Lambertides, Neophytos, 2021. "Financial distress risk and stock price crashes," Journal of Corporate Finance, Elsevier, vol. 67(C).
    5. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    7. Ye, Yilin, 2025. "Monetary policy uncertainty, inefficient investment, and stock price crash risk," Finance Research Letters, Elsevier, vol. 85(PC).
    8. Qian Liu & Libin Qin & Xuena Liu, 2025. "Supply Chain Digitalization and Firms' Access to Bank Loans: Evidence From China," Economics and Politics, Wiley Blackwell, vol. 37(3), pages 931-945, November.
    9. Ruan, Lei & Li, Jianing & Huang, Siqi, 2025. "ESG rating adjustment and capital market pricing efficiency: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 98(C).
    10. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    11. Zhang, Man & Brookins, Oscar T. & Huang, Xiaowei, 2022. "The crowding out effect of central versus local government debt: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    12. Qu, Yu-xuan & Guo, Ye & Qu, Yu-fei, 2025. "Epidemic shocks, structural monetary policy and SME financing in China," Economic Analysis and Policy, Elsevier, vol. 88(C), pages 54-79.
    13. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, vol. 101(3), pages 713-730, September.
    14. Wang, Chih-Wei & Chiu, Wan-Chien & King, Tao-Hsien Dolly, 2020. "Debt maturity and the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 112(C).
    15. Huang, Shuo, 2022. "The unintended consequence of local government debt: evidence from stock price crash risk," Finance Research Letters, Elsevier, vol. 50(C).
    16. Zhang, Zhongqingyang & Mao, Ruixiang & Zhou, Zhongbao & Zeng, Zhijian, 2023. "How does digital finance affect green innovation? City-level evidence from China," Finance Research Letters, Elsevier, vol. 58(PB).
    17. Xiaoting Ling & Yuan George Shan & Wuqing Wu & Lu Zhang & Xinyue Zhang, 2025. "Do overpaid dividends drive stock price crash risk?," Economics and Politics, Wiley Blackwell, vol. 37(1), pages 7-58, March.
    18. Fan, Jianyong & Liu, Yu & Zhang, Qi & Zhao, Peng, 2022. "Does government debt impede firm innovation? Evidence from the rise of LGFVs in China," Journal of Banking & Finance, Elsevier, vol. 138(C).
    19. Rajan, Raghuram & Winton, Andrew, 1995. "Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-1146, September.
    20. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    21. Zhu, Jun & Zhu, Man & Yang, Zhiwei, 2024. "The financialization of local government debt in China and its risk transmission to commercial banks," Economic Modelling, Elsevier, vol. 133(C).
    22. Yin, Liang & Hu, Shiyang & Yan, Huijun, 2025. "Local government implicit debt and corporate bankruptcy: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 107(C).
    23. Ren, Zhongfu & Zhou, Haiyang & He, Yiqi, 2026. "Local government debt risk and corporate risk-taking: The dual mechanisms of credit crowding-out and policy uncertainty," International Review of Financial Analysis, Elsevier, vol. 110(C).
    24. Chaoying Lin & Lerong He & Guangqing Yang, 2021. "Targeted monetary policy and financing constraints of Chinese small businesses," Small Business Economics, Springer, vol. 57(4), pages 2107-2124, December.
    25. Zhang, Mingxin & Lin, Min & Sun, Yanmei & Wu, Weixing, 2025. "Targeted monetary policy and household business credit access: Based on the credit asset pledge relending policy," Emerging Markets Review, Elsevier, vol. 66(C).
    26. Wei Zhu, 2016. "Accruals and price crashes," Review of Accounting Studies, Springer, vol. 21(2), pages 349-399, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Makrychoriti, Panagiota & Pyrgiotakis, Emmanouil G., 2024. "Firm-level political risk and stock price crashes," Journal of Financial Stability, Elsevier, vol. 74(C).
    2. Lin, Tse-Chun & Liu, Jinyu & Ni, Xiaoran, 2022. "Foreign bank entry deregulation and stock market stability: Evidence from staggered regulatory changes," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 185-207.
    3. Andreou, Christoforos K. & Andreou, Panayiotis C. & Lambertides, Neophytos, 2021. "Financial distress risk and stock price crashes," Journal of Corporate Finance, Elsevier, vol. 67(C).
    4. Ni, Xiaoran & Peng, Yuchao & Shen, Ji & Vigne, Samuel A. & Wang, Nanxuan, 2025. "Available-for-sale is available for hoarding: When nonfinancial firms hold financial assets," Journal of Banking & Finance, Elsevier, vol. 171(C).
    5. Long, Huaigang & Tao, Cuixia & Yao, Zhongwei & Zhu, Yanjian, 2025. "Visible hands versus invisible hands: Default risk and stock price crashes in China," Pacific-Basin Finance Journal, Elsevier, vol. 91(C).
    6. Zhao, Rui & Zhang, Dayong & Guo, Mengmeng, 2024. "Do natural disasters affect stock price crash risk? Evidence from emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    7. Choi, Young Mok & Park, Kunsu, 2022. "Zero-leverage policy and stock price crash risk: Evidence from Korea," International Review of Financial Analysis, Elsevier, vol. 81(C).
    8. Chen, Jing & Liu, Xinghe & Ou, Fenghao & Lu, Meiting & Wang, Peipei, 2023. "Green lending and stock price crash risk: Evidence from the green credit reform in China," Journal of International Money and Finance, Elsevier, vol. 130(C).
    9. Krishnamurti, Chandrasekhar & Chowdhury, Hasibul & Han, Hien Duc, 2021. "CEO centrality and stock price crash risk," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    10. Surendranath Jory & Thanh Ngo & Hongxia Wang, 2021. "Non‐operating earnings and firm risk," Review of Financial Economics, John Wiley & Sons, vol. 39(1), pages 95-123, January.
    11. Hu, Gang & Liu, Yiye & Wang, Jacqueline Wenjie & Zhou, Gaoguang & Zhu, Xindong, 2022. "Insider ownership and stock price crash risk around the globe," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    12. Ryan Flugum & Svetlana Orlova & Andrew Prevost & Li Sun, 2021. "Distracted institutions, information asymmetry and stock price stability," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 2015-2048, October.
    13. Min Jung Kang & Y. Han (Andy) Kim & Qunfeng Liao, 2020. "Do bankers on the board reduce crash risk?," European Financial Management, European Financial Management Association, vol. 26(3), pages 684-723, June.
    14. Xiaoyu Cui & Jianlei Han & Jeong Bon Kim & Baolei Qi, 2024. "Federal judge ideology, securities class action litigation, and stock price crash risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(4), pages 4131-4155, December.
    15. Jiang, Kangqi & Du, Xinyi & Chen, Zhongfei, 2022. "Firms' digitalization and stock price crash risk," International Review of Financial Analysis, Elsevier, vol. 82(C).
    16. Wang, Xiaoxiao & Liu, Haiming, 2022. "The impact of rollover restriction on stock price crash risk," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    17. Leilei Gu & Jinyu Liu & Yuchao Peng, 2022. "Locality Stereotype, CEO Trustworthiness and Stock Price Crash Risk: Evidence from China," Journal of Business Ethics, Springer, vol. 175(4), pages 773-797, February.
    18. Ma, Xiaofang & Wang, Wenming & Wu, Jiangang & Zhang, Wenlan, 2020. "Corporate customer concentration and stock price crash risk," Journal of Banking & Finance, Elsevier, vol. 119(C).
    19. Hamdi Ben-Nasr & Sabri Boubaker, 2024. "Government debt and stock price crash risk: International Evidence," Post-Print hal-04648524, HAL.
    20. Acheampong Albert & Mahdi Mousavi & Giray Gozgor & Yeboah Patrick, 2025. "The Impact of Text‐Based Financial Constraints on Stock Price Crash Risk: Evidence From the UK Firms," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(4), pages 4132-4150, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecopol:v:38:y:2026:i:2:p:575-597. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0954-1985 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.