Abstract
The pressure upon local governments to redeem their debt could affect government fiscal ability. It could consequently affect their fiscal policies on corporations, which might distort corporate innovation. Based on the data of Chinese Shanghai and Shenzhen A-share listed companies and the local government implicit short-term debt financed by local government financing vehicles (LGFVs) in 31 provinces, this paper shows that local government debt (LGD) negatively affects corporate R&D investment in China, thereby suggesting a strong crowding-out effect. The crowding-out effect is more pronounced when the firm is a non-state-owned enterprise (NSOE), the firm's size is small, the firm's age is young, or the firm is in the lower market competition. This paper provide evidence by interacting the terms that local government actions, such as consumption of fiscal resources, strengthening tax collection efforts, or consumption of credit resources, might partially account for the crowding-out effect. This study illustrates the innovation costs of local government debt.
Highlights
Since the 2008 financial crisis and the 2010 European debt crisis, the economic consequences of government debt, especially the effects of government debt on micro-enterprises, have attracted the attention of academia and government regulators alike
The results show that the coefficients of local government debt (LGD) are significantly negative, suggesting that LGD will crowd out corporate R&D investment
In column (4), we show that the coefficient of LGD is still significantly negative, which indicates that LGD will crowd out corporate R&D investment even when we consider special samples
Summary
Since the 2008 financial crisis and the 2010 European debt crisis, the economic consequences of government debt, especially the effects of government debt on micro-enterprises, have attracted the attention of academia and government regulators alike. From a theoretical perspective, local government debt will have an impact on corporate innovation. Our results are robust because we conducted a series of robustness checks as follows: (1) using the sum of LGFVs’ bond issuance amount with the same maturity as the instrumental variable, (2) alternative measures of the corporate R&D investment and local government debt, (3) changing the empirical model, (4) excluding the interference of other fiscal and taxation policies, and (5) employing other robustness checks. Our study contributes to the following aspects It adds to the literature on the microeconomic consequences of government debt on corporate. We explore the determinants of corporate innovation from the perspective of local government debt. We use a unique data to study the economic consequences of LGD on corporate innovation from a debt redemption pressure perspective.
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