Stock markets, local governments leverage, and regional economic development: Evidence from China

Abstract

In this paper, we examine the relationship between stock market development, the regional economic development gap, and local government behavior using two-way fixed-effects and threshold-effects models based on provincial panel data from China between 2011 and 2021. The results reveal a significant negative correlation between stock market development and the regional economic development gap, suggesting that the former promotes the coordinated development of the regional economy. And this effect is higher when the local government facing a high leverage. Considering the threshold effect of local government economic participation and the regional disparities, we find the level of local government economic participation is low, the development of the stock market widens the gap in terms of regional economic development, vice versa. Therefore, the promotion role of the stock market in the coordinated development of the regional economy requires appropriate assistance from local governments. Additionally, the threshold value in the south is significantly lower than in the north, indicating that local governments in the north should provide more guidance and assistance to the market, to foster coordinated regional economic development through the development of the stock market. Based on these findings, we recommend that China accelerates and improves the construction of multi-level stock markets to leverage the positive role of these markets in achieving coordinated regional economic development.