Credit Crowding-Out and Risk Transmission: The Impact of Extended Local Government Debt Maturity on Corporate Debt Structure

Abstract

Few studies examine whether the gap-filling effect, whereby the maturity structure of local government debt shapes corporate debt maturity, also holds in emerging, bank-dominated economies. Using data on Chinese local government financing vehicle (LGFV) bonds from 2009 to 2023, this study examines how the maturity structure of local government debt influences that of corporate debt. The results reveal a pronounced gap-filling effect, whereby longer local government debt maturities systematically crowd out long-term credit resources, raise corporate financing costs, and prompt firms to shorten their debt maturities. This effect is more salient during economic downturns and when local government debt levels are elevated. Heterogeneity analysis shows substantial variation in the gap-filling effect across regions, industries, and firm characteristics. In addition, firms with shorter debt maturities are found to face higher financial risks. This study contributes by providing policy evidence for fiscally decentralized emerging markets: local government maturity choices transmit to firms’ financing structure, implying that local debt management is instrumental for financial stability.