Does local government debt discourage corporate risk-taking? The roles of share pledging and housing price growth*

Using bonds issued by local government financing vehicles across Chinese prefectures from 2010 to 2019, we find a significant negative association between local government debt and corporate risk-taking. This relationship is mitigated by controlling shareholders’ share pledging but exacerbated by housing price growth. Heterogeneous analyses reveal that the moderating effect of share pledging is more pronounced for non-infrastructure firms, while the exacerbating effect of housing price growth is stronger for non-SOEs and non-infrastructure firms. Our findings suggest a crowding-out effect of government debt on corporate investment and indicate that expanding financing channels through share pledging could mitigate its adverse impact.