Haiming Liu, Cuiyan Zhang
This paper examines the impact of government debt on the speed of capital structure adjustment by using 28,051 firm-year observations of Chinese listed firms from 2007 to 2021. We find that more local government debt leads to lower firm-level leverage adjustment speed. Transmission tests show that government debt reduces firm-level bank loan financing, raises the cost of debt, and increases agency costs. Heterogeneous results show that for non-state-owned firms, high-growth firms, high-leveraged firms, and firms in which the largest shareholder holds a lower proportion of shares, the negative impact of government debt on the speed of leverage adjustment is greater. In addition, the effect of government debt on leverage adjustment speed is more pronounced for firms in regions where the government debt volume is larger, the fiscal pressure is greater, or the formal institutions are weaker. Finally, greater leverage deviation arising from more government debt weakens firm values.