Local government debt and firm productivity: Evidence from China

The growth of the Chinese economy has been accompanied by an increasing trend in the size of Chinese government debt in recent years, but corporate yields are falling. We establish a nonlinear causal relationship between the efficiency of local government debt in China calculated by the DEA method at the prefecture level and firm total factor productivity (TFP) to examine the effect of local government debt on firm productivity. Improving local government debt efficiency will improve corporate productivity in the long run, but the short-term effect is opposite. Our study finds that the misallocation of local government debt increases, corporate productivity will decrease. The study explores a possible development path of China's economy: improving the efficiency of debt. There needs to be a reasonable match between efficiency and scale to promote the high-quality development of firms.