The impact of local government debt on corporate inefficient investment

In recent years, the rapid expansion of local government debt and the accumulation of debt risks have posed potential threats to China's long-term economic stability. Using a matched dataset of China's A-share listed firms and prefecture-level city macroeconomic data from 2008 to 2021, this paper systematically investigates the impact of local government debt on corporate inefficient investment and its underlying mechanisms. The empirical results show that the expansion of local government debt significantly increases corporate inefficient investment, primarily by exacerbating corporate over-investment. Mechanism analyses indicate that: (1) local government debt expansion stimulates public investment and amplifies corporate inefficient investment through the fiscal investment multiplier effect; (2) local government debt increases corporate financialization, which partially mitigates inefficient investment; and (3) local government debt reduces firms' tax burdens, thereby reinforcing corporate inefficient investment. Further heterogeneity analyses reveal that the adverse effect of local government debt on inefficient investment is more pronounced among firms facing lower financing constraints, weaker internal controls, and larger firm size, as well as in regions with lower fiscal pressure and higher levels of economic development. This study enriches the literature on the microeconomic consequences of local government debt from the perspective of corporate investment efficiency and provides both theoretical and empirical evidence supporting the central government's efforts to strengthen local government debt regulation and prevent systemic risks.