Social credit and corporate leverage: Evidence from a natural experiment in China

The rapid growth of leverage is one of the risk factors for China's economy. To explore social credit's impact on corporate leverage's growth rate, we conduct the staggered difference‐in‐difference (DID) approach based on a quasi‐natural experiment of the social credit system reform. Our findings indicate that social credit significantly suppresses the growth rate of corporate leverage, which remains robust after some robustness checks. In addition, this effect can be attributed to alleviating agency costs and information asymmetry. Finally, our analysis reveals that the above effects are significant only for firms with poor corporate governance, high bankruptcy risk, low investment efficiency, and a low proportion of tangible assets. In summary, our study provides micro‐level evidence on the economic consequences of social credit system reform in China and policy insights on how the government can effectively control the growth rate of corporate leverage to prevent risk.