Political motives of excess leverage in state firms

Abstract

This study explores the political motives behind the enormous indebtedness of Chinese state firms. To measure the excess leverage of state firms, the difference between actual and predicted values, we balance the samples of private and state firms by matching and using the former sample to generate an out-of-sample prediction for the latter. Our results suggest that the excessive indebtedness of state firms positively relates to regional unemployment pressure and economic pressure faced by municipal politicians. These effects are more pronounced in local state firms and when local officials have stronger promotion incentives. Our paper provides evidence that government control leads to significant political influence over the real decisions of firms.