Dissipation of Debt Financing Privilege on Corporate AI Washing: Evidence from China

Congluo Xu, Jiuyue Liu, Xiangsheng Zheng and Ziyang Li

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Abstract: The rapid development of artificial intelligence motivates firms to engage in AI washing. This study examines whether strategic policy shocks increase debt financing costs for such firms. Leveraging China's 14th Five Year Plan as a quasi natural experiment, we identify AI washing through the residual between AI narrative intensity and patent output. External validation confirms this decoupling reflects strategic deception evidenced by subsidy extraction and future regulatory violations rather than benign ambition, supporting its validity as an AI washing proxy. Difference in differences estimations reveal that AI washing firms experience a 12.5 basis point relative increase in debt financing cost afterward. Joint estimation confirms simultaneous adjustments across financing and innovation margins. Management shareholding and analyst attention amplify the penalty while supply chain concentration and bank proximity attenuate it. Results remain robust across checks. Our findings illuminate how macro level policy shocks activate market discipline in emerging market debt markets.

Date: 2026-05
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