Financing Constraints, Local Government Debt, and Corporate Stock Returns: An Empirical Analysis

Against the background of expanding local government debt in China, it is inevitable that firms will be affected by local government debt in some aspects. Based on the relevant data of Shanghai and Shenzhen A-share companies from 2000 to 2020, this paper conducts an empirical analysis by constructing an OLS model. From the results, it can be seen that local government debt can, on the one hand, lead to higher corporate share price returns by alleviating financing constraints, which brings a positive boost to corporate share prices; at the same time, local government debt can increase corporate financing constraints, which indirectly leads to lower corporate share price returns and has a negative inhibitory effect on corporate share prices. The relationship between local government debt, financing constraints and stock price returns is still unclear in the current academic world. It is hoped that this paper can fill the gap in academic research through theoretical mechanism construction and empirical model analysis, so that local government debt can better play its effectiveness.