Abstract

We evaluated the effect of an exogenous shock on municipal government debt financing reform on corporate innovation for a sample of Chinese-listed firms from 2009 to 2019. The results show that this reform stimulates corporate innovation capacity, and the effect is more pronounced in non-state-owned and financially constrained firms. We attribute these findings to reduced external financing costs and the crowding-out effect of a firm's real estate investment. Our results are robust to alternative variable definitions, model specifications, and estimation techniques and provide novel evidence concerning the role of municipal government financing in corporate innovation.