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| Local Government Financial Pressure and Corporate Default Risk |
| LIANG Shangkun, WANG Sichao, DONG Qing, XIE Zhihua
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School of Accountancy, Central University of Finance and Economics;
Business School, Beijing Technology and Business University |
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Abstract The exacerbation of financial pressure on local governments leads to a series of adverse consequences, disrupts market development, negatively affects resource allocation, and worsens regional governance. These changes may further impact local governments, increasing their already strained financial pressure and exacerbating their fiscal difficulties. Therefore, alleviating financial pressure and preventing its adverse effects remain essential tasks for current economic development and social stability. Additionally, preventing corporate defaults is crucial for the stability of capital markets and the overall development of the national economy. Currently, research on corporate default risk mostly focuses on micro-level factors from the perspective of individual firms, while studies from an external macro-level perspective are relatively scarce. The research question of whether changes in fiscal pressure from local governments will affect the corporate default risk within their jurisdiction is of great significance in the current context.
The process by which local government financial pressure affects corporate default risk can be divided into two stages. Firstly, local governments transfer their pressure to enterprises by increasing revenue and reducing expenditures. Specifically, governments increase tax revenue and non-tax revenue, while reducing subsidies and unnecessary government procurement to alleviate financial pressure. Secondly, after passively bearing the financial pressure from local governments, enterprises experience changes in their fundamental factors. These changes include increased effective tax burden, impacts on investment behavior, increased debt levels, and reduced sales scale, ultimately leading to an increase in default risk.
Using Chinese A-share listed companies from 2003 to 2020 as the sample, this paper finds that: (1) For every one standard deviation increase in local government financial pressure, corporate default risk increases by 4.74% relative to the mean; (2) Compared to non-state-owned enterprises, state-owned enterprises are more affected by financial pressure, aligning with the “social function perspective” rather than the “resource constraint perspective”; (3) In terms of transmission mechanisms, local governments transfer financial pressure by increasing revenue and reducing expenditures, which in turn leads to changes in business behavior and ultimately increases corporate default risk; (4) The ability of enterprises to acquire resources, profitability, regional resource distribution, and regional economic development significantly moderate the relationship between financial pressure and default risk.
This paper makes theoretical contributions in two main aspects. Firstly, it expands the research on factors influencing corporate default risk, providing a new perspective for understanding default risk in the Chinese context. In China, local governments are policy implementers and important resource allocators within regions, playing a fundamental role in shaping corporate behavior. This paper explores the reasons for the aggregation of corporate default risk from a high-dimensional macro-level perspective, which helps to understand the relationship between other micro variables influenced by this factor and default risk from a more fundamental perspective. Secondly, it improves the analysis framework of “increasing revenue and reducing expenditure”, accurately depicting the process of financial pressure transmission by local governments. This paper introduces the dimensions of increasing non-tax revenue and reducing government procurement, expanding the existing transmission mechanism from two important aspects closely related to business operations. Furthermore, by analyzing the changes in corporate fundamentals caused by local government financial, this paper builds a bridge to understand how enterprises' response to pressure leads to changes in microeconomic consequences.
This paper has important practical implications for government policy-making and adjustment, corporate default risk prevention, and investors' understanding and avoidance of investment risks. Firstly, through rationalizing initial allocation, diversifying assessment goals, and diversifying fiscal revenues, excessive competitive spending by local governments can be reduced, alleviating financial pressure and avoiding systemic risks. Secondly, owners or managers of enterprises should consider the internal and external operating environment, optimize business structure, and allocate internal resources reasonably when making or adjusting decisions. This will help transform the constraining force of external pressure into nutrients and catalysts for business operations and development and prevent default risk caused by short-sighted behavior. Thirdly, capital market investors, while focusing on corporate performance and industry policies, should also analyze the current and future development possibilities faced by enterprises in conjunction with the regional economic situation. This will help investors make correct and reasonable investment decisions and avoid risks.
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Received: 10 October 2023
Published: 03 July 2024
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