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Is a deleveraging policy effective? Evidence from China

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  • Qiu, Baoyin
  • Cheng, Bo

Abstract

Leveraging the quasi-natural experiment of a nationwide deleveraging campaign (the Campaign) by the Central Economic Work Conference in December 2015 in China, we examine the impact of deleveraging adoption on the financial leverage, cost of debt, corporate investment, cash holdings, research & development (R&D) investment, and performance of firms. We find that: 1) The Campaign lowers financial leverage in all firms, 2) state-owned firms (SOEs) lower their long-term financial leverage more than those of non-SOEs, 3) both SOEs and non-SOEs make less corporate investments, hold more cash, make more R&D investment, and exhibit poorer operating performance, and 4) Relative to non-SOEs, SOEs exhibit lower cost of debt, more corporate investments, holding more cash, making less R&D investments, and exhibit better operating performance post-Campaign. While the Campaign drives firms to lower their leverage, it brings unintended consequence for firms in terms of cost of debt, corporate investments, cash, and R&D, which ultimately adversely affects firms’ operating performance.

Suggested Citation

  • Qiu, Baoyin & Cheng, Bo, 2022. "Is a deleveraging policy effective? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 471-480.
    • Handle: RePEc:eee:reveco:v:77:y:2022:i:c:p:471-480
    DOI: 10.1016/j.iref.2021.10.015
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    2. Li, Cong & Wang, Yiming & Sun, Weiguo & Yu, Yue & Ding, Yuzhen, 2024. "Green credit policy and corporate deleveraging: Evidence from China," Finance Research Letters, Elsevier, vol. 66(C).
    3. Wang, Hua & Chen, Yaorui, 2024. "The impact of population aging on capital structure decisions and capital market efficiency: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 95(PB).

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    More about this item

    Keywords

    Deleveraging campaign; Financial leverage; Cost of debt; Investment; Cash holdings; R&D; Performance; State-owned firms;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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