Risk repricing after weakening implicit local government guarantees: evidence from China

This paper examines whether weakening implicit local government guarantees (ILGGs) reshapes corporate equity pricing. Using China’s nationwide reform and data on 2,109 listed firms from 2015 to 2023, we estimate an intensity difference-in-differences model based on pre-reform debt exposure. Firms in more exposed cities exhibit a significant post-reform decline in the cost of equity. The evidence is consistent with a market-based risk-repricing process in which investors place greater weight on firm fundamentals as government-induced pricing distortions recede. Supporting analyses show patterns consistent with improved market-based capital allocation and stronger market discipline. The effect is statistically concentrated among non-state-owned enterprises and firms in competitive industries. Our findings provide new evidence that fiscal reforms removing implicit guarantees can generate positive spillovers for capital market pricing.