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The crowding out effect of government debt on corporate financing: Firm-level evidence from China

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  • Liu, Qiongzhi
  • Bai, Yun
  • Song, Hexin

Abstract

The local government debt risk has attracted government regulators' attention, and its economic consequences have become a new research topic. Based on data from Chinese prefecture-level cities, this paper empirically examines the impact of local government debt on corporate financing from 2006-2018. The results show that government debt financing reduces total corporate debt financing, increases the cost of corporate debt financing, and has a crowding-out effect on corporate debt financing. Local government financing through the financing platform company injects quality projects and reduces the financing constraints of the financing platform to attract credit resources from banks. Insides, the government provides a guarantee for the financing platform company and reduces the bond risk of the financing platform to attract investors to purchase. Severing the link between local governments and financing platform companies can reduce the crowding-out effect to a certain extent. The results of this paper provide evidence for the micro effects of local government fiscal policy, which are informative for further improving the financing capacity of enterprises.

Suggested Citation

  • Liu, Qiongzhi & Bai, Yun & Song, Hexin, 2023. "The crowding out effect of government debt on corporate financing: Firm-level evidence from China," Structural Change and Economic Dynamics, Elsevier, vol. 65(C), pages 264-272.
    • Handle: RePEc:eee:streco:v:65:y:2023:i:c:p:264-272
    DOI: 10.1016/j.strueco.2023.03.005
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    More about this item

    Keywords

    Government debt; Corporate finance; Crowding-out effect; Credit resource; Debt risk;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • 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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