How Rising Local Government Debt Hurts Firm-Level Total Factor Productivity: Evidence from Financing Constraints and Uncertainty

Firm-level total factor productivity (TFP), as a cornerstone of microeconomic performance, underpins sustained corporate growth and regional vitality. Using panel data on A-share listed firms from 2010 to 2022 matched with city-level debt measures based on interest-bearing urban investment bonds, we find that higher local debt significantly reduces firm TFP. Mechanism tests show two complementary channels. First, a crowding-out effect, whereby heightened debt tightens financing constraints. Second, a signaling effect, under which higher debt raises environmental uncertainty and further curtails investment and innovation. Heterogeneity analysis indicates that cities with underdeveloped economies and lower fiscal transparency, as well as manufacturing firms and non-state-owned enterprises, are more severely affected. The findings enrich the literature on fiscal risks and microproductivity and suggest policy priorities in debt management, credit allocation, and expectation stabilization to safeguard firm-level productivity.