The effect of local government debt on green innovation: Evidence from Chinese listed companies

Based on the “income and expenditure” identity, we examine the Chinese provincial-level government debt from 2011 to 2019 and empirically analyze the effect of local government debt on corporate green innovation. Our results show that an increase of one standard deviation in the provincial debt-to-GDP ratio results in a 3.08% decline in the level of corporate green innovation. The crowding-out effect is stronger for provinces with lower fiscal self-sufficiency capability and for companies with less tangible assets. Mechanism tests show that elevated local government debt exacerbates corporate financial constraints, raises financing costs, and motivates companies to take on “short-term debt for long-term investment”, which ultimately weakens the green innovation ability of companies while creating large financial risks. To tackle these adverse shocks, our analyses find that improving the level of banking competition, strengthening environmental regulations, and promoting the development of green finance can alleviate the negative impact of local debt on corporate green innovation.