Local government audit and municipal debt risk: Evidence from audit reform in China

Xiaowei Lin, Sicen Chen, Xin Cheng and Jinmei Wang

Finance Research Letters, 2022, vol. 50, issue C

Abstract: The high level of local government debt surged during the past years and became a serious policy concern in China. This paper provides evidence supporting the positive effect of local government audits on municipal debt risk. Using the 2015 audit reform in China as a shock to the independence of local government auditors, we find that audits significantly decrease local government over-debts. The effect is more pronounced when local officials face stronger promotion motivation and severer soft budget constraints. Further, the role of local government audits in mitigating municipal debt risk depends on the legal environment and provincial government bureaucracies.

Keywords: Local government audits; Agency problem; Municipal debt risk (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004044

DOI: 10.1016/j.frl.2022.103198

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