Local government debt expansion and enterprise total factor productivity

Abstract

To enhance understanding of local government debt issues under high-quality development, this paper examines the relationship between local government debt expansion and enterprise total factor productivity (TFP) using data from prefecture-level cities and Shanghai and Shenzhen A-share listed firms from 2003 to 2019. Results reveal a significant inverse U-shaped relationship, driven by the positive effects of innovation and the adverse effects of resource misallocation. Heterogeneity analysis shows that this relationship is particularly pronounced in state-owned enterprises (SOEs), firms with low financing constraints, those with low equity concentration, and enterprises located in central and western regions. This study evaluates the optimal debt balance and offers policy recommendations to mitigate fiscal risks.