Abstract
Based on the data of 21 provinces from 2000 to 2018, this paper empirically examines the impact of government debt on corporate financing decisions, and finds that there is a negative correlation between government debt and corporate leverage. In large enterprises, private enterprises and enterprises in economically developed areas, the negative relationship is stronger. In order to deal with the potential endogenous problems, we use the government debt excluding the province GDP as the instrumental variable, and take the financial crisis and the 4 trillion policy as the division point to divide two periods of time as the robustness test. The results show that government debt crowds out corporate debt.
Highlights
The 2008 Global Financial Crisis (GFC) greatly damaged the financial systems of economies all over the world, causing the slowdown of global economic growth
To address the concerns about the possible endogeneity that the firm-level leverage ratio and local government debt both can be affected by some mutual factors, such as macroeconomic situation, we use lagged regressors as instruments variable to check the robustness of our basic regression results
We investigate the impact of government debt on firms’ capital structure decision using firm-level data on all provinces in China between 2000-2018
Summary
The 2008 Global Financial Crisis (GFC) greatly damaged the financial systems of economies all over the world, causing the slowdown of global economic growth. We combine the government's macrolevel chengtou bonds with the company's micro-level leverage, focusing on the crowd-out effect of local government debt financing on firm leverage. To address the concerns about the possible endogeneity that the firm-level leverage ratio and local government debt both can be affected by some mutual factors, such as macroeconomic situation, we use lagged regressors as instruments variable to check the robustness of our basic regression results. Compared with the previous literature, the mainly contributions of this paper are: Firstly, the data of previous studies are mainly based on Western countries, and whether the results of the study are applicable to China remains to be further verified, and our paper is based on the firm-level evidence from China, using the amount of chengtou bonds in each provinces as the measurement of the government debt.
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