The impact of local government debt on leverage adjustment speed: evidence from a quasi-natural experiment of local governmental debt governance reform

Purpose This study takes China’s 2014 local government debt governance reform as a quasi-natural experiment. It aims to examine how the reform affects corporate leverage adjustment speed, and explores whether it eases the structural imbalance of corporate debt between state-owned and non-state-owned enterprises, to provide implications for local debt management. Design/methodology/approach This paper adopts a quasi-natural experiment design based on China’s 2014 local government debt governance reform. It conducts empirical tests to identify the reform’s impact on corporate leverage adjustment speed, and performs heterogeneity and additional analyses to verify the influencing mechanisms and effects. Findings The 2014 debt governance reform accelerates firms’ leverage adjustment speed by reducing firm risk and bank relationship costs. This effect is stronger in regions with larger implicit local debt and more new local government bonds. The reform also alleviates the debt structure imbalance between SOEs and non-SOEs in China. Originality/value This study offers new evidence from a quasi-natural experiment on how local government debt governance shapes corporate leverage dynamics. It reveals the real effect of the debt reform on micro-firms, and provides new insights for optimizing local debt governance and corporate capital structure.