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Local government audit and municipal debt risk: Evidence from audit reform in China

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  • Lin, Xiaowei
  • Chen, Sicen
  • Cheng, Xin
  • Wang, Jinmei

Abstract

The high level of local government debt surged during the past years and became a serious policy concern in China. This paper provides evidence supporting the positive effect of local government audits on municipal debt risk. Using the 2015 audit reform in China as a shock to the independence of local government auditors, we find that audits significantly decrease local government over-debts. The effect is more pronounced when local officials face stronger promotion motivation and severer soft budget constraints. Further, the role of local government audits in mitigating municipal debt risk depends on the legal environment and provincial government bureaucracies.

Suggested Citation

  • Lin, Xiaowei & Chen, Sicen & Cheng, Xin & Wang, Jinmei, 2022. "Local government audit and municipal debt risk: Evidence from audit reform in China," Finance Research Letters, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004044
    DOI: 10.1016/j.frl.2022.103198
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    References listed on IDEAS

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    Cited by:

    1. Dong, Xiaojun & Yu, Xiaowen & Shi, Tao & Qiao, Dan, 2024. "Nexus between carbon emissions and local debt risk: Evidence from China's prefecture-level cities," International Review of Financial Analysis, Elsevier, vol. 93(C).
    2. Zhao, Meiyu & Zhang, Bo, 2023. "Credit corruption, financial constraint and corporate innovation: Evidence on China," Finance Research Letters, Elsevier, vol. 53(C).
    3. Xiaoyu Li & Jiawei Tang & Chao Feng & Yexiao Chen, 2023. "Can Government Environmental Auditing Help to Improve Environmental Quality? Evidence from China," IJERPH, MDPI, vol. 20(4), pages 1-21, February.

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