Local Government Debt and Firm Zombification: Evidence from China

Yang He (), Yun Ma (), Meng Tang () and Lu Wang ()
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Yang He: School of Public Finance and Taxation Central University of Finance and Economics Changping District, Beijing, 102206, China
Yun Ma: School of Economics Fudan University Yangpu District, Shanghai, 200433, China
Meng Tang: Antai College of Economics and Management Shanghai Jiao Tong University Xuhui District, Shanghai, 200030, China
Lu Wang: School of Public Finance and Taxation Central University of Finance and Economics Changping District, Beijing, 102206, China

Asian Economic Papers, 2023, vol. 22, issue 2, 68-95

Abstract: We analyze the effects of local government debt on the proliferation of zombie firms. With aggregated prefecture-level debt data and firm-level data from 2006 to 2013, the empirical evidence demonstrates that the local government debt significantly exacerbates the “zombification” of local firms, mainly through the credit-favoritism to state-owned enterprises and capital misallocation. Our analysis also shows that the magnitude of zombification effects is influenced by debt liquidity and the primary functions of local government financing vehicles.

Date: 2023
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