Does the Expansion of Local Government Debt Affect the ESG Performance of Enterprises? Evidence From China

Abstract

As an important fiscal policy of local governments, local government borrowing has an increasingly prominent impact on micro-enterprises. However, there is still a lack of effective verification on whether local government debt (LGD) will affect the Environmental, Social, and Corporate Governance (ESG) performance of enterprises. This paper uses micro data of Chinese listed companies from 2011 to 2020 and LGD data at the prefecture-level city layer to test the impact and mechanism of the expansion of LGD on corporate ESG performance by establishing panel regression models and mediating effect models. The results show that the expansion of LGD significantly reduces the ESG performance of local enterprises and presents a long-term inhibitory effect. The mechanism analysis indicates that the expansion of LGD suppresses corporate ESG performance by crowding out corporate credit resources, reducing government fiscal subsidies to enterprises, thereby worsening corporate cash flow. Furthermore, the negative impact of LGD expansion on corporate ESG performance is more pronounced in non-state-owned enterprises, those with high leverage, high industry competition, high technological intensity, low marketization, and low financial development levels. Furthermore, the expansion of LGD mainly reduces corporate social and environmental responsibility but has no significant impact on internal governance. The inhibitory effect of LGD on ESG is not caused by publicly issued urban investment bonds but stems from non-publicly issued debts. This paper extends the research on the microeconomic consequences of LGD to the field of corporate ESG, providing insights for comprehensively assessing the risks of LGD and promoting the construction of corporate ESG.