High Government Leverage and High Corporate Leverage: Crowding-in or Crowding-out

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.