Does the Deleveraging Policy Increase the Risk of Corporate Debt Default: Evidence from China

ABSTRACT

This article investigates whether a deleveraging policy influences the risk of corporate debt default. We provide evidence that the deleveraging policy can increase the risk of corporate debt default by reducing the supply of credit funds and increasing the cost of debt financing, and the conclusions remain robust after controlling for endogeneity problems. Furthermore, we find that the impact of the deleveraging policy on corporate debt default risk is more significant for enterprises with poor operating performance, nonstate-ownership, backward capacity, and developed shadow banking areas. Those findings provide a theoretical basis for the macrodecision transition from deleveraging to stabilizing leverage.

KEYWORDS:

• Debt default risk
• deleveraging policy
• credit fund supplies
• debt financing cost

JEL:

• G18
• G32

Notes

1. Policy details could be found in the following reports: the Proposal of the Fifth Plenary Session of the 18th CPC Central Committee on the “13th Five-Year Plan” (Oct.2015); Opinions on Actively and Firmly Reducing the Enterprise Leverage Ratio (Oct.2016); meeting of the Central Political Bureau (Dec.2017); meetings of the five ministries and commissions (Apr.2018, July 2018, Aug.2018).

2. According to our model, there might be a multi-collinearity problem between Deleverage and ΣYear, however, the results of variance inflation factor deny the doubts. And in order to make sure of this, we re-test the regression results after excluding Year variables, the results are still significant at the 0.01 level. The results of the two tests are not listed in the article due to space limitations. the results of variance inflation factor deny the doubts. And in order to make sure of this, we re-test the regression results after excluding Year variables, the results are still significant at the 0.01 level. The results of the two tests are not listed in the article due to space limitations.

3. It should be noted that due to the multicollinearity problem, the broad money supply growth rate M2, the total RMB credit growth rate Loan and the debt default risk Default1 are excluded, so only the regression result of the corporate debt default risk Default2 is listed below.

Additional information

Funding

This work was supported by the National Social Science Foundation of China [71802043]; Ministry of Education (MOE) Project of Humanities and Social Sciences [18YJC630007]; Foundation of Liaoning Social Sciences Project [L16CGL005]; In addition, this paper was also supported by the China Internal Control Research Center of Dongbei University of Finance and Economics.