IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v15y2023i14p11116-d1195664.html
   My bibliography  Save this article

Local Government Debt and Its Impact on Corporate Underinvestment and ESG Performance: Empirical Evidence from China

Author

Listed:
  • Mingyao Cao

    (School of Management, Universiti Sains Malaysia, Gelugor 11800, Penang, Malaysia
    Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore 259772, Singapore)

  • Keyi Duan

    (School of Management, Universiti Sains Malaysia, Gelugor 11800, Penang, Malaysia
    Department of City and Regional Planning, University of North Carolina at Chapel Hill, Chapel Hill, NC 27514, USA)

  • Haslindar Ibrahim

    (School of Management, Universiti Sains Malaysia, Gelugor 11800, Penang, Malaysia)

Abstract

ESG ratings are closely linked to corporate resource allocation and overarching macroeconomic constituents. Nevertheless, there is a noticeable lack in the literature investigating the interconnected relationship between the growth of local government debt, corporate underinvestment, and ESG ratings. This study aims to investigate the impact of local government debt on corporate underinvestment and its subsequent effects on corporate ESG performance. To achieve this goal, this study utilizes special bond data from Chinese provinces spanning the period between 2015 and 2021. The findings suggest that as local government debt swells, it imposes financing constraints on local companies, leading to underinvestment, particularly for listed companies with a high proportion of fixed assets and non-state-owned enterprises. A key effect is a “crowding-out effect” in which local government debt absorbs resources that could otherwise be allocated to private corporations and non-investment sectors. This trend illuminates the concealed costs of a debt-reliant growth model extending beyond the financial sector to impact broader corporate behavior and ESG performance. Our research suggests that government debt, corporate financing constraints, and ESG investment are intimately linked. The study concludes with policy implications and recommendations aimed at mitigating the investment gap in Chinese enterprises and promoting sustainable economic growth.

Suggested Citation

  • Mingyao Cao & Keyi Duan & Haslindar Ibrahim, 2023. "Local Government Debt and Its Impact on Corporate Underinvestment and ESG Performance: Empirical Evidence from China," Sustainability, MDPI, vol. 15(14), pages 1-18, July.
    • Handle: RePEc:gam:jsusta:v:15:y:2023:i:14:p:11116-:d:1195664
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/15/14/11116/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/15/14/11116/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ester Clementino & Richard Perkins, 2021. "How Do Companies Respond to Environmental, Social and Governance (ESG) ratings? Evidence from Italy," Journal of Business Ethics, Springer, vol. 171(2), pages 379-397, June.
    2. Law, Siong Hook & Ng, Chee Hung & Kutan, Ali M. & Law, Zhi Kei, 2021. "Public debt and economic growth in developing countries: Nonlinearity and threshold analysis," Economic Modelling, Elsevier, vol. 98(C), pages 26-40.
    3. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    4. Rubo Zhao & Yixiang Tian & Ao Lei & Francis Boadu & Ze Ren, 2019. "The Effect of Local Government Debt on Regional Economic Growth in China: A Nonlinear Relationship Approach," Sustainability, MDPI, vol. 11(11), pages 1-22, May.
    5. Wu, Fulong, 2022. "Land financialisation and the financing of urban development in China," Land Use Policy, Elsevier, vol. 112(C).
    6. Kunyu Tao, 2015. "Assessing Local Government Debt Risks in China: A Case Study of Local Government Financial Vehicles," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 23(5), pages 1-25, September.
    7. Demirci, Irem & Huang, Jennifer & Sialm, Clemens, 2019. "Government debt and corporate leverage: International evidence," Journal of Financial Economics, Elsevier, vol. 133(2), pages 337-356.
    8. Chong-En Bai & Chang-Tai Hsieh & Zheng Michael Song, 2016. "The Long Shadow of a Fiscal Expansion," NBER Working Papers 22801, National Bureau of Economic Research, Inc.
    9. Shiyuan Pan & Kang Shi & Lisheng Wang & Juanyi Xu, 2017. "Excess liquidity and credit misallocation: evidence from China," China Economic Journal, Taylor & Francis Journals, vol. 10(3), pages 265-286, September.
    10. Gyourko, Joseph & Shen, Yang & Wu, Jing & Zhang, Rongjie, 2022. "Land finance in China: Analysis and review," China Economic Review, Elsevier, vol. 76(C).
    11. Zhenfa Li & Fulong Wu & Fangzhu Zhang, 2022. "A multi-scalar view of urban financialization: urban development and local government bonds in China," Regional Studies, Taylor & Francis Journals, vol. 56(8), pages 1282-1294, August.
    12. Halkos, George E. & Papageorgiou, George J. & Halkos, Emmanuel G. & Papageorgiou, John G., 2020. "Public debt games with corruption and tax evasion," Economic Analysis and Policy, Elsevier, vol. 66(C), pages 250-261.
    13. Keyi Duan & Mingyao Cao & Nurhafiza Abdul Kader Malim, 2022. "The Relationship between Trade Liberalization, Financial Development and Carbon Dioxide Emission—An Empirical Analysis," Sustainability, MDPI, vol. 14(16), pages 1-14, August.
    14. Ye, Zhen & Zhang, Fangzhu & Coffman, D’Maris & Xia, Senmao & Wang, Zhifeng & Zhu, Zhonghua, 2022. "China’s urban construction investment bond: Contextualising a financial tool for local government," Land Use Policy, Elsevier, vol. 112(C).
    15. Shihong Zeng & Yujia Qin & Guowang Zeng, 2019. "Impact of Corporate Environmental Responsibility on Investment Efficiency: The Moderating Roles of the Institutional Environment and Consumer Environmental Awareness," Sustainability, MDPI, vol. 11(17), pages 1-21, August.
    16. Yousha Liang & Kang Shi & Lisheng Wang & Juanyi Xu, 2017. "Local Government Debt and Firm Leverage: Evidence from China," Asian Economic Policy Review, Japan Center for Economic Research, vol. 12(2), pages 210-232, July.
    17. Gudrun Erla Jonsdottir & Throstur Olaf Sigurjonsson & Ahmad Rahnema Alavi & Jordan Mitchell, 2021. "Applying Responsible Ownership to Advance SDGs and the ESG Framework, Resulting in the Issuance of Green Bonds," Sustainability, MDPI, vol. 13(13), pages 1-20, June.
    18. Fan, Joseph P. H. & Titman, Sheridan & Twite, Garry, 2012. "An International Comparison of Capital Structure and Debt Maturity Choices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 23-56, February.
    19. Liu, Liyun & Zhao, Zhenzhi & Zhang, Mingming & Zhou, Dequn, 2022. "Green investment efficiency in the Chinese energy sector: Overinvestment or underinvestment?," Energy Policy, Elsevier, vol. 160(C).
    20. Zhu, Jun & Xu, Haokun & Zhang, Yue, 2022. "Local government debt and firm productivity: Evidence from China," Research in International Business and Finance, Elsevier, vol. 63(C).
    21. Ji, Yucheng & Xu, Weijun & Zhao, Qi & Jia, Zecheng, 2023. "ESG disclosure and investor welfare under asymmetric information and imperfect competition," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chunyan Jiang, 2024. "Revolutionizing Economic Growth Analysis: a Novel Computational Approach to Assessing the Influence of Technological Financial Efficiency on Real Economic Growth," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(3), pages 11286-11317, September.
    2. Han, Wei & Wu, Di, 2024. "ESG ratings, business credit acquisition, and corporate value," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    3. Cao, Mingyao & Duan, Keyi & Ibrahim, Haslindar, 2023. "Green investments and their impact on ESG ratings: An evidence from China," Economics Letters, Elsevier, vol. 232(C).
    4. Yuanlin Wu & Cunzhi Tian & Guannan Wang, 2023. "Local Government Debt and Corporate Investment Behavior in China: Real versus Financial Investment," Sustainability, MDPI, vol. 15(22), pages 1-22, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhu, Jun & Xu, Haokun & Zhang, Yue, 2022. "Local government debt and firm productivity: Evidence from China," Research in International Business and Finance, Elsevier, vol. 63(C).
    2. Xiong, Jiacai & Huang, Ling & Yang, Zelin & Wang, Xin, 2024. "The impact of local government debt on entrepreneurship: Evidence from a quasi-natural experiment of local debt governance reform," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 501-519.
    3. Ge Gao & Jichang Dong & Xiuting Li, 2022. "Local Government Debt, Real Estate Investment and Corporate Investment: Evidence from China," Sustainability, MDPI, vol. 14(19), pages 1-21, September.
    4. Liu, Yan & Wu, Guowei & Xiong, Chen, 2024. "Countercyclical central government transfers incentivize local government overborrowing: Theory and evidence," Economic Modelling, Elsevier, vol. 132(C).
    5. Chen, Wen & Zhu, Yufeng & He, Zehui & Yang, Yang, 2022. "The effect of local government debt on green innovation: Evidence from Chinese listed companies," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    6. Wang, Jiaxin & Huang, Xiang & Gu, Qiankun & Song, Zilong & Sun, Ruiyi, 2023. "How does fintech affect bank risk? A perspective based on financialized transfer of government implicit debt risk," Economic Modelling, Elsevier, vol. 128(C).
    7. Qiong Zhou & Qian Tan & Huixiang Zeng & Yu-En Lin & Peng Zhu, 2023. "Does Soil Pollution Prevention and Control Promote Corporate Sustainable Development? A Quasi-Natural Experiment of “10-Point Soil Plan” in China," Sustainability, MDPI, vol. 15(5), pages 1-20, March.
    8. Bao, Helen X.H. & Wang, Ziyou & Wu, Robert Liangqi, 2024. "Understanding local government debt financing of infrastructure projects in China: Evidence based on accounting data from local government financing vehicles," Land Use Policy, Elsevier, vol. 136(C).
    9. Shen, Zhihan & Zhang, Ruipeng & Li, Peigong, 2024. "Local government debt and corporate tax avoidance: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 985-1000.
    10. Deng, Jiapin & Liu, Qiao, 2024. "Good finance, bad finance, and resource misallocation: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 159(C).
    11. Gu, Yanwei & Guo, Jing & Liang, Xiao & Zhao, Yajun, 2022. "Does the debt-growth link differ across private and public debt? Evidence from China," Economic Modelling, Elsevier, vol. 114(C).
    12. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    13. Xuan Leng & Pengcheng Li & Yuming Zheng, 2023. "Does the expansion of local government debt affect the export quality?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2495-2515, June.
    14. Jing, Zhongbo & Liu, Wei & Wang, Zexi & Wei, Lu & Zhang, Xuan, 2024. "Does local government debt regulation improve rural banks’ performance? Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    15. Zhang, Man & Brookins, Oscar T. & Huang, Xiaowei, 2022. "The crowding out effect of central versus local government debt: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    16. Wan, Peng & Chen, Xiangyu & Ke, Yun & Dong, Wang, 2024. "Does local government debt affect corporate social responsibility? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 334-348.
    17. Haiyun Ma & Deshuai Hou, 2023. "Local Government Debt and Corporate Maturity Mismatch between Investment and Financing: Evidence from China," Sustainability, MDPI, vol. 15(7), pages 1-17, April.
    18. Cai, Yue, 2021. "Expansionary monetary policy and credit allocation: Evidence from China," China Economic Review, Elsevier, vol. 66(C).
    19. Hai Xie & Weikun Zhang & Hanyuan Liang, 2023. "Can Local Government Debt Decrease the Pollution Emission of Enterprises?—Evidence from China’s Industrial Enterprises," Sustainability, MDPI, vol. 15(11), pages 1-20, June.
    20. Wang, He & Yao, Yang & Zhou, Yue, 2022. "Markets price politicians: Evidence from China’s municipal bond markets," Journal of Economics and Business, Elsevier, vol. 122(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:15:y:2023:i:14:p:11116-:d:1195664. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.