High Government Leverage and High Corporate Leverage: Crowding-in or Crowding-out
DOI:
https://doi.org/10.54097/n7z3ag84Keywords:
Local debt, Corporate leverage, Crowding out effectAbstract
This paper uses panel data of non-financial listed companies between 2012 and 2018 to empirically analyze the impact of local government debt on corporate leverage. We find that as the scale of local government debt expands, it has a negative impact on corporate leverage. However, this impact varies a lot across industries. For the real estate industry, we surprisingly found that it has crounding-in effect which is different from others industry.Moreover, this impact on corporate leverage also varies by enterprise size and equity nature. The government's local debt affects the internal cash stock of enterprises, which in turn reduces the leverage of enterprises, verifying the channel through which the crowding-out effect arises. The analysis in this paper provides empirical guidance for improving the leverage structure of the Chinese economy.
Downloads
References
[1] Admati, A.R., DeMarzo, P.M. Hellwig, M.F. & Pfleiderer, P.C., 2012. Debt Overhang and Capital Regulation., Rock Center for Corporate Governance at Stanford University, Working Paper, No. 114.
[2] Ang, A., Bai, J., & Zhou, H., 2018. The Great Wall of Debt: Real Estate, Political Risk, and Chinese Local Government Financing Cost, Georgetown McDonough School of Business Research Paper, PBCSF-NIFR Research Paper No. 15− 02.
[3] Badoer, D.C., James, C.M., 2016. The determinants of long-term corporate debt issuances, Journal of Finance, 71 (1), 457–492.
[4] Baker, M., Wurgler, J., 2002. Market Timing and Capital Structure. Journal of Finance, 57, 1–32.
[5] Baron R M, Kenny D A., 1986. The Moderator-mediator Variable Distinction in Social Psychological Research: Conceptual, Strategic, and Statistical Considerations. Journal of Personality and Social Psychology, 51(6).
[6] Bo Becker, Victoria Ivashina, 2018. Financial Repression in the European Sovereign Debt Crisis. Review of Finance, 83–115
[7] Clarke, D., Lu, F., 2017. The Law of China’s Local Government Debt: Local Government Financing Vehicles and their Bonds. Am. J. Comp. Law 65 (4), 751–798.
[8] De Jong, A., Kabir, R. & Nguyen, T.T., 2008. Capital Structure Around the World: the Roles of Firm-and Country-specific Determinants. J. Bank. Finance 32 (9), 1954–1969.
[9] Demirci, I., Huang, J. & Sialm, C., 2019. Government Debt and Corporate Leverage: International Evidence, Journal of Financial Economic, 133(2), 337-356.
[10] Eberhardt, M., A.F. 2015. Presbitero, Public Debt and Growth: Heterogeneity and Non-Linearity.Journal of International Economics, 97(1):45—58.
[11] Fan, J.P., Titman, S., & Twite, G., 2012. An International Comparison of Capital Structure and Debt Maturity Choices. Journal of Financial and Quantitative Analysis 47 (01), 23–56.
[12] Ferre De Graeve, Giulio Mazzolini, 2023. The Maturity Composition of Government Debt: A Comprehensive Database, European Economic Review, Volume 154.
[13] Frank, M.Z., Goyal, V.K., 2003. Testing the Pecking Order Theory of Capital Structure. Journal of Financial Economics. 67, 217–248
[14] Friedman, B. M.,1978. Crowding Out or Crowding In: Economic Consequences of Financing
[15] Government Deficit, Brookings Papers on Economic Activity, 9(3), 593-641.
[16] Graham, M.T. Leary, M.R. Roberts., 2014. How does Government Borrowing Affect Corporate Financing and Investment? J. R.
[17] Greenwood, S. Hanson, J.C. Stein., 2010. A Gap-Filling Theory of Corporate Debt Maturity Choice. The Journal of Finance, 65 (3), 993-1028.
[18] Hailian Xiao, Ying Zhao, & Meihua Zhou, Can Financial Factors Affect Corporate Debt Leverage Convergence? Pacific-Basin Finance Journal, 72 (2022) 101728.
[19] Jaffe, J.F, 1978. A Note on Taxation and Investment. Journal of Finance, 33, 1439-1445.
[20] Keefe, M.O.C., Yaghoubi, M., 2016. The Influence of Cash Flow Volatility on Capital Structure and the Use of Debt of Different Maturities. Journal of Corporate Finance, 38, 18–36.
[21] Krishnamurthy, Vissing-Jorgensen., 2012. The Aggregate Demand for Treasury Debt. Journal of Political Economy, 20 (2): 233-267.
[22] Lemmon, M.L., Roberts, M.R. & Zender, J.F., 2008. Back To The Beginning: Persistence and the Cross-section of Corporate Capital Structure. Journal of Finance, 63, 1575–1608.
[23] Liang,Y, K. shi & L. Wang, 2017. Local Government Debt and Firm Leverage: Evident from China. Asian Economic Policy Review, 12(2):210—232
[24] Man Zhang, Oscar T. Brookins & Xiaowei Huang, 2022. The Crowding Out Effect of Central Versus Local Government Debt: Evidence from China. Pacific-Basin Finance Journal, 72.101707.
[25] McDonald, R. L. 1983. Government Debt and Private Leverage: An Extension of the Miller
[26] Theorem. Journal of Public Economics, 22(3), 303-325.
[27] Mengtao Zhang, Wenchuan Chen, Aidi Kou & Yanjun Wu, 2023. Promotion Incentives, Tenure Uncertainty, and Local Government Debt Risk, Finance Research Letters,Volume 56.104136.
[28] Mo, J., 2018. Land Financing and Economic Growth: Evidence from Chinese Counties, China Economic Review, 50, 218-239.
[29] Qiongzhi Liu, Yun Bai, Hexin Song., 2023. The Crowding Out Effect of Government Debt on Corporate Financing: Firm-level Evidence from China, Structural Change and Economic Dynamics.
[30] Rangarajan C, Srivastava D K., 2005. Fiscal Deficits and Government Debt: Implications for Growth and Stabilisation. Economic & Political Weekly, 40(27):2919-2934
[31] Robin Greenwood, Samuel Hanson, & Jeremy C. Stein, 2010. A Gap-Filling Theory of Corporate Debt Maturity Choice. The journal of Finance. Volume 60, No. 3.
[32] Seema Narayan, Minh Ngoc Thi Bui, Yishuai Ren & Chaoqun Ma., 2021. Macroeconomic Determinants of US Corporate Leverage, Economic Modelling, 104 105646.
[33] Tang, P., Shi, X., Gao, J. Feng, S. & Qu, F., 2019. Demystifying the Key for Intoxicating Land Finance in China: An Empirical Study through the Lens of Government Expenditure, Land Use Policy, 85, 302-209.
[34] Wu, Q., Li, Y., & Yan, S. 2015. The Incentives of China's Urban Land Finance, Land Use Policy, 42, 432-442.
[35] Xi Qu, Zhiwei Xu, Jinxiang Yu & Jun Zhu, 2023. Understanding Local Government Debt in China: A Regional Competition Perspective, Regional Science and Urban Economics, Volume98, 103859.
[36] Yusuf Ayturk. 2017. The Effects of Government Borrowing on Corporate Financing: Evidence from Europe, Finance Research Letters 20 (2017) 96–103
[37] Zhang, Yuanyan Sophia & Barnett, Steven, 2014. Fiscal Vulnerabilities and Risks from Local Government Finance in China, IMF Working Paper.
Downloads
Published
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
