Local governments’ debt risk and enterprise innovation

ABSTRACT

This paper applies KMV modified model to construct a local governments’ debt risk index by using the local governments’ financial revenue and expenditure data and the data of Chinese A-share listed companies, and studies the relationship between local government debt risk and enterprise innovation. The results show that the increased risk of local government debt can encourage enterprises to increase R&D investment, which is more significant when the enterprises are politically connected, the provincial officers have a longer tenure, the provinces are more market-oriented, and the enterprises get more refunds of taxes. This paper provides empirical evidence for the state theory, which suggests that competition for political promotion among local officials can make the goal of personal political promotion of officials agree to intend to maximize social welfare.

KEYWORDS:

• Local governments’ debt risk
• enterprise innovation
• the state theory

JEL CLASSIFICATION:

• G3
• H74

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The National Natural Science Foundation of China (No. 71772174 and No. 72072178).