Government Intervention and Debt Financing Costs: Evidence from Government-Guided Funds

Few studies examine how government intervention influences debt financing costs. We use firm ownership by government-guided funds ("GG funds" or "GGFs") as a proxy for government intervention and explore whether and how GG funds influence debt financing costs. Using a 2009–2020 sample of A-share listed firms in China, we find that GG funds significantly increase debt financing costs, mainly because firms held by GGFs signal more information regarding their poor financial situation and performance to debt providers, which thus charge higher interest rates for loans. Moreover, this effect is stronger for firms located in the eastern region, for firms with a higher market index and for non-SOEs (vs. SOEs). Overall, we provide evidence that the government plays an important monitoring role in debt financing costs through GGF ownership.