Frontiers in Business, Economics and Management ISSN: 2766-824X | Vol. 7, No. 2, 2023 65 Research on the Influence of Local Government Debt on Enterprise Debt Financing Wenping Kong Xi 'an Polytechnic University, Xi 'an 710048, Shaanxi Province, China Abstract: In recent years, China's local government debt and corporate debt issues have attracted the attention of academia and the government. At present, the financing difficulties of SMEs have become a problem in the industry. Although the existing literature has studied the impact of local government debt on the debt financing of micro enterprises, the academic circles still hold disputes on the "crowding out effect" and "crowding in effect" of local government debt on micro enterprise behavior. This paper selects the panel data of provincial local government debt and A-share listed companies from 2012 to 2020 to explore the impact of local government debt on corporate debt financing from the scale and structure of corporate debt financing. According to the empirical results, the expansion of local government debt will lead to a decline in the debt financing level of local enterprises. From the perspective of different debt sources, the impact of local government debt expansion is significantly different. Local government debt expansion has a strong and significant crowding out effect on corporate financial liabilities, while this effect on corporate operating liabilities is weak. Accordingly, this paper puts forward corresponding suggestions: local governments should reasonably control their own debt scale, implement differentiated deleveraging policies according to local conditions, strengthen the cooperation between financing platforms and private capital, vigorously develop the direct financing market, and create good conditions for enterprise financing. Keywords: Local government debt, Corporate debt financing, Debt financing structure. 1. Introduction Local government debt has always been the focus of academic attention. This is mainly because the local government debt has a wider impact, whether on the macro economy or micro enterprises. Since 2012, with the continuous expansion of local government debt, the transparency of local government debt in China has been decreasing and the debt risk has been increasing. At present, due to the impact of the epidemic situation, the conflict between Russia and Ukraine and other external factors, most Chinese enterprises are facing difficulties in financing. With the further implementation of the policy of stable growth, the burden of local finance has become heavier and heavier. Local governments and micro enterprises are inextricably linked, and the development of enterprises cannot be separated from the development of macro economy. Therefore, it is of great value to investigate the impact of local government debt on corporate debt financing, and further explain the current difficulty of corporate debt financing, which will help alleviate the current problem of corporate debt financing. 2. Literature Review Whether local government debt is squeezed out of corporate debt financing or included in corporate debt financing has been controversial in the academic community. Most scholars believe that the expansion of local government debt will affect the portfolio and pricing of investors, and then affect the leverage ratio of enterprises, that is, government debt is negatively correlated with enterprise debt (Graham&M. T, 2014; Krishnamurthy&Jorgensen, 2015)[1][2]. The increase of local government debt has pushed up the cost of corporate debt and thus affected the level of corporate debt (Wang Jinxiang et al., 2020; Wu Junpei et al., 2021) [3][4]. Considering the crowding in effect of infrastructure construction and the crowding out effect of credit, the impact of local government debt expansion on enterprise financing has regional heterogeneity, which shows that local government debt expansion will increase the scale of enterprise financing in the eastern region but have no impact on enterprise financing in the western region (Hu Yumei, 2019)[5]. Further research shows that the negative effect of local government debt on corporate debt financing is more significant in regions with large scale, strong profitability and developed equity financing markets (Irem Demirci, 2019) [6], and the crowding out effect exists in the heterogeneity of regions and enterprise types (Liang Y, 2017; Liu Qizhi and Baiyun, 2020)[7][8]. A few scholars believe that the impact of local government debt on corporate debt is not negative. The increase of government debt will squeeze out junk debt and squeeze into the safety debt of enterprises (Chemla&Hennessy, 2016) [9]. Sun Gang and Zhu Kai (2017) used data from 247 prefecture level cities to test the impact of local debt governance on corporate debt financing, and found that the worse the local debt governance, the higher the corporate leverage [10]. Qu Qingchun and Zhuang Xin (2021) studied the threshold effect of the degree of financial marketization on the impact of local government debt on the scale of corporate debt financing [11]. 3. Theoretical Analysis and Research Hypothesis 3.1. Local government debt and enterprise debt financing Based on the theory of "portfolio effect", the impact of local government debt expansion on micro enterprise debt financing is reflected in price competition mechanism and demand competition mechanism. According to the demand competition mechanism, on the one hand, because the government can carry out administrative intervention on 66 banks to a certain extent, based on the needs of safe operation and credit rationing, banks will first meet the capital needs of the government departments, and the credit resources of the whole society will decrease, leading to the reduction of credit funds available to the enterprise departments, which will further reduce the scale of debt financing. On the other hand, the local government owns land and other resources, which has become a kind of implicit financial guarantee, prompting the local government to obtain loans at a lower interest rate when borrowing, thus occupying high-quality resources. The explanation of price competition mechanism is that when local governments issue a large number of bonds, the price of government bonds will decline and the yield will rise. On the one hand, the valuation of bonds will decline, and investors will reduce the purchase of such bonds; On the other hand, when considering their own asset portfolio, financial institutions either invest more funds in government bonds or require enterprises to increase bond yields. Either way will increase the cost of debt financing for enterprises, leading to a reduction in the scale of debt financing for enterprises. Therefore, hypothesis 1 is put forward: the expansion of local government debt will cause the decline of enterprise debt financing scale. 3.2. Local government debt, enterprise financial debt and operating debt In order to explore the relationship between government debt and different sources of corporate debt, corporate debt is divided into financial debt and operating debt according to sources. It can be seen from the demand competition mechanism that local government debt is mainly used to squeeze out the debts of enterprises through the channels of credit resources, while the operational liabilities of enterprises are derived from daily business activities. Therefore, from this perspective, the expansion of local government debt is mainly used to squeeze out financial liabilities rather than operational liabilities of enterprises through credit channels. Secondly, as far as the cost of debt is concerned, commercial credit has not yet implemented an interest bearing system, and the related operational liabilities are low-cost or even cost free; However, the high interest rate system implemented by bank credit and related financial liabilities are high costs. In addition, as far as financing of Chinese enterprises is concerned, operational liabilities always take priority over financial liabilities. Enterprises will first consider adopting operational liabilities with low costs and risks (Li Xinhe et al., 2014) [12]. According to the explanation of the price competition mechanism, the expansion of local government debt mainly increases the cost of enterprise debt financing. Compared with operational debt, the cost of financial debt is much higher than the cost of operational debt, which leads to the fact that during the period of local government debt expansion, enterprises will reduce the scale of financial debt more compared with operational debt. Therefore, hypothesis 2 is put forward: the expansion of local government debt has squeezed out more corporate financial liabilities than operational liabilities. 4. Research Design 4.1. Data source There are three sources of variable data selected in this paper: (1) enterprise level data, mainly from CSMAR Guotai'an database; (2) The statistical data at the provincial and municipal level are mainly from the China Statistical Yearbook of each year; (3) The debt data at the government level are publicly available through the budget and final accounts of provincial finance departments. This paper selects all listed non-financial enterprises in the A-share market from 2012 to 2020 as samples. Due to the availability of data, it proposes Taiwan Province, Hong Kong Special Administrative Region, Macao Special Administrative Region and Tibet Autonomous Region, and finally uses panel data from 30 provinces in China. In order to ensure the integrity and validity of the data, enterprises with abnormal financial data and serious data missing were eliminated. The unbalanced panel was treated as a balanced panel, and the continuous variables were shrunk. Finally, the nine year effective data of 1424 sample enterprises, including 12816 observations, were obtained. 4.2. Variable selection 4.2.1. Explanatory variables The explanatory variable of this paper is the level of local government debt, measured by the local government debt ratio (gdebt), which is the ratio of the debt balance that the local government is responsible for repaying to the GDP of the region. 4.2.2. Interpreted variable The main explanatory variable of this paper is enterprise debt financing, which is measured by the enterprise's asset liability ratio (Cdebt), that is, total enterprise debt divided by total assets. The other explanatory variables are shown in Table 1. Table 1. Variable Description Classification Variable Name Indicator Description Explanatory variable Local government debt level Local government debt ratio (%) Explained variable debt financing asset Enterprise asset liability ratio (%) Financial liabilities Interest bearing liabilities/total assets (%) Operating liabilities interest free liabilities/total assets (%) Control variable growth rate GDP growth rate (%) Inflation CPI Enterprise growth (amount of operating revenue in the current period - amount of operating revenue in the same period of last year)/amount of operating revenue in the same period of last year Cash holding level Monetary capital/total assets Enterprise scale Logarithm of total assets(yuan) Return on assets After tax net profit/total assets 67 4.2.3. Control variables With reference to the practice of Fan Xiaoyun, Zhu Chenhe, etc.[13][14], control variables at the national macro level and the enterprise micro level are selected, as shown in Table 1. It can be seen from Table 2 that the average asset liability ratio of the sample enterprises from 2012 to 2020 is about 44%, the minimum value is about 1%, and the maximum value is close to 98%, which indicates that the debt levels of different companies or years vary greatly. The financial debt ratio of the sample enterprises is about 17%, and the operating debt ratio is about 21%. The average local government debt ratio is about 23%, the minimum value is about 5%, the maximum value is close to 142%, and the difference between the maximum and the minimum value is as high as 137%, indicating that the economic scale of different provinces has a large difference in the carrying capacity of local debt, which provides a good data basis for the empirical study in this paper, and can easily capture the impact of local debt expansion on corporate debt financing. Table 2. Descriptive Statistics of Variables variable Number of samples Mean 50% quantile standard deviation minimum maximum Local government debt ratio 12816 0.232 0.192 0.137 0.045 1.423 Enterprise asset liability ratio 12816 0.437 0.435 0.202 0.008 0.975 Financial liabilities 12816 0.167 0.143 0.145 0.000 0.760 Operating liabilities 12816 0.212 0.183 0.130 0.007 0.828 Economic growth rate 12816 7.281 7.600 2.409 -5.000 13.800 Inflation 12816 102.208 102.266 0.573 100.567 103.900 Enterprise Growth 12816 0.134 0.085 0.333 -0.518 1.955 Cash holding level 12816 20.579 20.461 1.383 12.107 26.494 Enterprise scale 12816 22.569 22.378 1.346 19.078 28.636 Return on assets 12816 0.042 0.035 0.059 -0.662 0.675 The previous article has analyzed the impact of local government debt expansion on enterprise debt financing from the theoretical level. In order to explore how local government debt expansion affects the scale of enterprise debt financing, the following model is constructed: Considering the different sources of corporate debt financing, in order to more carefully study the impact of local government debt expansion on corporate debt financing structure, the following model is built: Among them, Cdebt in model (1) is the explanatory variable, representing the scale of corporate debt financing; Finlev and Opelev in model (2) and (3) represent corporate financial liabilities and corporate operating liabilities respectively; the explanatory variable is local government debt/GDP, which is intercept term, coefficient of variable, individual fixed effect, and random disturbance term. If the empirical results show that it is significantly negative, it means that there is a negative correlation between the two. 5. Empirical Results and Analysis 5.1. Regression results 5.1.1. Impact of local government debt expansion on enterprise debt financing scale Table 3 shows the benchmark regression results of local government debt and enterprise debt financing. With the increase of control variables, the impact of local government debt expansion on corporate debt financing generally shows a downward trend, and finally tends to be stable, as shown in column (2). After considering the control variables, control years and individual effects, the local government debt ratio and the enterprise asset liability ratio are negatively correlated at the level of 1%, and the correlation coefficient is -0.033, which indicates that the enterprise debt financing scale will decrease 0.033 units for each unit of local government debt increase. Assumption 1 is valid. 68 Table 3. Benchmark Regression Results of Local Government Debt and Enterprise Debt Financing (1) (2) Enterprise Asset liability ratio Enterprise Asset liability ratio Local government debt ratio -0.034*** -0.033*** (-3.23) (-3.16) Inflation 0.004* 0.005** (1.73) (2.31) Economic growth rate 0.000 0.001 (0.41) (0.74) Growth 0.001*** 0.001*** (5.99) (7.50) Cash holding level -0.045*** -0.038*** (-15.73) (-13.66) Enterprise scale 0.134*** 0.130*** (21.67) (21.88) Return on assets -0.445*** (-14.22) Constant term -2.041*** -2.210*** (-7.45) (-8.49) Firm fixed effect Control Control Year fixed effect Control Control Number of samples 12816 12816 𝑅 0.200 0.254 F 2158.376 825.677 5.1.2. Local government debt, enterprise financial debt and operating debt Table 4 shows the regression results of local government debt, corporate financial debt and operating debt. It can be seen that the local government debt ratio is negatively correlated with the financial debt ratio at the level of 5%, and the correlation coefficient is -0.02, which means that the financial debt of enterprises decreases by 0.02 units every time the local government debt increases by 1 unit. At the same time, there is a negative correlation between local government debt ratio and operating debt ratio, but it is not significant. The correlation coefficient is -0.007, indicating that every increase in local government debt will reduce the operating debt of enterprises by 0.007 units. This shows that the local government debt ratio is significantly negatively correlated with the financial debt ratio, while the correlation with the operating debt ratio is weak and not significant. That is, the expansion of local government debt will significantly squeeze out the financial liabilities of enterprises, while the crowding out effect on operating liabilities is not obvious. Assumption 2 is proved. Table 4. Regression Results of Local Government Debt and Debt Financing of Enterprises from Different Sources Financial liabilities Operating liabilities Local government debt ratio -0.020** -0.007 (-2.25) (-0.94) Inflation 0.001* 0.000 (1.67) (0.43) Economic growth rate 0.001 0.005*** (0.59) (2.75) Growth -0.001*** 0.001*** (-37.98) (49.35) Cash holding level -0.021*** -0.012*** (-9.66) (-6.36) Enterprise scale 0.081*** 0.035*** (18.77) (8.10) Return on assets -0.358*** -0.055*** (-14.28) (-2.68) Constant term -1.326*** -0.848*** (-5.97) (-3.92) Firm fixed effect Control Control Year fixed effect Control Control Number of samples 12816 12816 𝑅 0.158 0.059 F 14000 7297.301 5.1.3. Robustness test Referring to the practice of Lu Zhengfei et al (2015) and Zhang Qingjun et al (2019)[15][16], this paper replaces the debt-to-asset ratio with the debt-to-excess ratio (Cdebt) to measure the corporate debt. The results are shown in column (2) of Table 5, there is a significant negative correlation between the local government debt ratio and the excessive corporate debt ratio. The results of robustness test show that the negative effect of local government debt expansion on corporate debt financing is still robust, so the conclusion of this paper is reliable. 69 Table 5. Robustness test Enterprise Excessive debt ratio Local government debt ratio -0.091*** (-2.60) Inflation 0.003 (1.06) Economic growth rate 0.024*** (3.20) Growth 0.001*** (5.19) Cash holding level -0.160*** (-13.23) Enterprise scale 1.397*** (67.15) Return on assets -1.027*** (-10.17) Constant term -8.950*** (-10.48) Firm fixed effect Control Year fixed effect Control Number of samples 12816 𝑅 0.827 F 813.462 6. Conclusions and Suggestions In recent years, the economic consequences of the expansion of local debt have become the focus of attention and discussion. At present, the financing difficulty of SMEs has become a problem in the industry. The empirical results of this paper are consistent with the existing views. The empirical results show that the expansion of local government debt will lead to the decline of the debt financing level of local enterprises. From the perspective of different debt sources, the impact of local government debt expansion is significantly different. Local government debt expansion has a strong and significant crowding out effect on corporate financial liabilities, while this effect on corporate operating liabilities is weak. The robustness test results of changing explanatory variables and explained variables show that the above research conclusions are still valid. Therefore, first, for each region, corresponding debt limit measures should be formulated to limit the scale of local debt and prevent local officials from issuing debt on a large scale to meet promotion requirements. 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