Does local government debt replacement affect corporate investment efficiency? Evidence from China

Mitigating local government debt risks is essential for safeguarding economic and financial stability. As a key instrument of structural deleveraging, the local government debt replacement programme may generate important spillover effects on firms, yet its microeconomic consequences and transmission mechanisms remain underexplored. Using China’s first-round LGDR programme during 2015–2018 as a quasi-natural experiment and a sample covering 248 prefecture-level cities, this study employs an intensity-based difference-in-differences approach to examine the impact of local government debt replacement on corporate investment efficiency and its underlying mechanisms. The results show that local government debt replacement significantly improves corporate investment efficiency. Mechanism analyses provide evidence consistent with two potential channels: improvements in firms’ external financing conditions and internal managerial efficiency. Heterogeneity analyses further reveal that the positive effect is stronger for non-state-owned firms, technology-intensive firms, and firms operating in competitive industries. This study enriches the literature on the microeconomic effects of local debt governance policies and provides new evidence on how debt-risk mitigation policies improve resource allocation and investment efficiency at the firm level.