Digital Finance and Corporate Leverage Manipulation: Evidence from China

Corporate leverage manipulation conceals the actual leverage ratio and increases systemic financial risks. It is urgent to explore ways to govern corporate leverage manipulation. Using the sample of Chinese A-share listed firms from 2011 to 2021, this paper explores the impact of digital finance on corporate leverage manipulation. We find that digital finance can significantly reduce corporate leverage manipulation and remains consistent with robustness tests such as the instrumental variable method and difference-in-difference model. Mechanism analysis shows that this inhibition effect is achieved by restraining information asymmetry, easing financing constraints, and promoting digital transformation. Moreover, the effect of digital finance on inhibiting leverage manipulation is more pronounced in corporates with less analyst following, smaller total assets, and higher agency costs. Further analysis shows that digital finance, by restraining corporate leverage manipulation behavior, effectively lowers the risk of corporate debt default. Our research provides a new perspective to govern corporate leverage manipulation and expands the microeconomic consequences of digital finance.