Local Fiscal Pressure and Corporate Leverage Manipulation: Evidence from the VAT 50/50 Sharing Reform in China

This study takes the 2016 VAT sharing reform of China as an exogenous shock to local fiscal pressure and examines its impact on corporate leverage manipulation. The results show that increased fiscal pressure leads to a significant rise in leverage manipulation, with regions experiencing greater fiscal strain after the reform seeing more pronounced manipulation. Mechanism tests reveal that fiscal pressure operates mainly by reducing firms’ access to fiscal and credit resources, as well as by spurring investment expansion through relaxed environmental regulation. These effects are more evident among non-SOEs, highly leveraged firms, and those with low financial transparency. Further analysis indicates that fiscal pressure also elevates corporate default risk by encouraging leverage manipulation. This study extends the “government intervention” theory of leverage manipulation and uncovers a transmission channel through which fiscal risk becomes financialized.