Abstract
The high level of local government debt surged during the past years and became a serious policy concern in China. This paper provides evidence supporting the positive effect of local government audits on municipal debt risk. Using the 2015 audit reform in China as a shock to the independence of local government auditors, we find that audits significantly decrease local government over-debts. The effect is more pronounced when local officials face stronger promotion motivation and severer soft budget constraints. Further, the role of local government audits in mitigating municipal debt risk depends on the legal environment and provincial government bureaucracies.
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