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The power of credit: can the implementation of a social credit system reduce the risk of corporate debt default?

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  • Zhao, Xiaoke
  • Li, Huirong
  • Liu, Shengtao

Abstract

The increasing pressure exerted by the recent economic downturn and global trade conflicts has considerably increased the risk of debt defaults in the real economy. Understanding how to reduce this risk is fundamental to ensuring the healthy and stable functioning of an economy. In this study, we use 62 pilot cities selected in 2015, 2016, and 2021 for the implementation of a social credit system in China as a quasi-natural experiment and panel data from A-share firms listed on the Shanghai and Shenzhen stock exchanges from 2008 to 2023 to empirically explore the role of social credit in reducing the risk of firm debt default. The results indicate that the establishment of a social credit system considerably reduces firms’ debt default risk. Furthermore, the establishment of a social credit system helps to ease firms’ financing constraints, reduces agency costs and improve the quality of information disclosure, which reduces the risk of corporate debt default. The impact on reducing debt default risk is more pronounced for firms located in regions with a better legal environment and non-state-owned firms. These findings affirm the positive role of a regional credit system in reducing the risk of corporate debt default and preventing systemic financial failures. This study also provides insights for policymakers regarding how to leverage the power of credit to reduce the risk of corporate debt default and prevent systemic financial failures.

Suggested Citation

  • Zhao, Xiaoke & Li, Huirong & Liu, Shengtao, 2025. "The power of credit: can the implementation of a social credit system reduce the risk of corporate debt default?," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 749-763.
    • Handle: RePEc:eee:ecanpo:v:86:y:2025:i:c:p:749-763
    DOI: 10.1016/j.eap.2025.04.004
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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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