Does digital finance alter the leverage decision of firms? Evidence from China

Jingyi Gao, Yuanming Ren and Xinyu Zhan

International Review of Financial Analysis, 2025, vol. 104, issue PA

Abstract: How to alleviate the financial risk of leverage has drawn significant attention from policymakers and researchers alike. In this paper, to fill that gap, we investigate the effect of digital finance on the dynamics of leverage by using a novel matched firm data in China and the moderating role of foreign firms. The main results in this paper show that when firms with less capability of external finance, most of them would like to increase the leverage under the increasing intensity of digital finance, and foreign firms would have a lower incentive to increase the debt intensity. In addition, the effects show heterogeneity among areas and industries. Firms with foreign ownership in east areas and high competition, labor intensity industries, and small and young firms are more sensitive to digital finance. We test the mechanism by adopting the lag term of leverage and digital finance, and the sub-indicators of digital finance, which proves that firms enjoy with higher digital finance degrees really support the rising of leverage to release financial constraints. Digital finance indeed gives more opportunity for those firms with comparative disadvantages in traditional finance system.

Keywords: Digital finance; Leverage; Heterogeneity; Promotion effect (search for similar items in EconPapers)
JEL-codes: D21 E44 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:104:y:2025:i:pa:s1057521925003382

DOI: 10.1016/j.irfa.2025.104251

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