Private Enterprise Debt Default Risk and Local Government Bailouts

Private enterprises have financing difficulties and face a greater risk of debt default in a complex environment; hence, it is important to explore the relationship between corporate debt default and local government relief. This paper theoretically analyzes and empirically examines the impact of private enterprise debt default risk on access to local government relief. The study finds that among private enterprises with equity pledges, those with higher debt default risk have a higher probability of obtaining local government bailouts, and this effect is especially obvious when the private enterprises are politically connected and are part of high-tech industries. Regarding the effects of bailouts, the short-term market response of private firms receiving bailouts is positive; among the current study’s sample of private firms with higher debt default risk, receiving a bailout had a positive effect on the firms’ long-term performance, and the effect was more pronounced for those that continued to receive bailouts. This study expands the perspective on the debt default risk of private firms to analyze local government support for private firms and examine the economic effects of sustained bailouts.