Local Government Debt and Corporate Green Innovation: Evidence From China

ABSTRACT This study investigates the heterogeneous impact of explicit and implicit local government debt in China. Using a comprehensive sample of A‐share listed firms, we find that the two forms of debt have contrasting effects. Local government implicit debt significantly suppresses firm‐level green innovation, while explicit debt promotes it. The mechanism analysis confirms that implicit debt crowds out credit resources, leading to reduced long‐term credit access, shorter debt maturity and higher borrowing costs for firms, thereby hindering their innovation efforts. Conversely, explicit debt facilitates resource allocation and financial stability, enhancing the firm's capacity for green R&D. Crucially, heterogeneity tests reveal that these detrimental effects are magnified by the local government implicit debt pressure, with the negative impact of implicit debt being significantly exacerbated in high‐pressure regions. Furthermore, the adverse effects are disproportionately borne by firms facing structural debt market discrimination. Non‐SOEs and small firms experience the strongest dampening effect from implicit debt, while SOEs and large firms are largely insulated. Our findings highlight the need for greater transparency in local government financing and offer novel policy insights for optimising fiscal policy to support green technological progress.