How does local government debt affect bank loan pricing? Evidence from loan-level data

Existing research focuses on the crowding out effect of local government debt on the quantity of corporate bank loans, but hardly explores the impact of local government debt on bank loan prices. This paper empirically finds that a rise in local government debt increases bank loan prices, based on the loan-level data of Chinese listed companies from 2011 to 2018. This result is robust to a battery of sensitivity tests. Besides, local government debt is found to affect the costs of unsecured loans and short-term loans more strongly. Hence, in response to the expansion of local government debt, enterprises may replace transaction loans with relationship loans to control financing costs. The mechanism tests show that local government debt increases loan prices by increasing both financial constraints and environmental uncertainty. The paper provides new insights into the impact of local government debt on corporate financing.