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

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  • 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
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    Cited by:

    1. 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).
    2. 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.

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