The role of instituions in the corporate debt-productivity relationship: evidence from listed firms in China

ABSTRACT

This paper examines the relationship between corporate debt and firm productivity. We add to the existing literature by investigating the contingency effect of institutional quality in the corporate debt-productivity nexus. Using data for 2,084 Chinese listed firms, we find that corporate debt and political institutional quality have significant and negative impacts on productivity while legal institutional quality is significantly and positively associated with productivity. Also, our results reveal that both financial and fintech-supporting institutional factors exert negative contingency effects in the corporate debt-productivity relationship. Our findings provide a reasonable guideline for emerging market countries aiming to address the corporate debt overhang problem or seeking factors to boost firm productivity growth.

KEYWORDS:

• corporate debt
• institutional quality
• firm productivity
• debt overhang

Acknowledgments

We would wish to thank the editor and the anonymous referees for many helpful comments. Any remaining errors remain solely ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Data availability statement

The data that support the findings of this study are available from the corresponding author upon reasonable request.

Notes

¹ Plenty of studies have investigated the relationship between formal institutions and firm productivity. For example, Moser (2005) stresses that good intelligent property rights (IPR) protection system to increase the costs of copying or stealing enterprise’s innovation by competitors. Also, proper government rules and regulations can motivate firms to carry out innovative activities, to some extent, which has the similar function to the legal institutions that can a protect the legitimate rights and interests of firms and reduce the possibility of innovation achievements being imitated (Berggren & Bjørnskov, 2022; Usman et al., 2021). In addition, the institutions for supporting fintech development benefit the fintech industry which have an ehancing effect on macro-level productivity growth (Heil, 2018). Also such institutions provides more convenient, intelligent and personalized service to meet firms’ preferred requirements and reduce the cost of capital, which consenquently can improve firm productivity (Gomber et al., 2017).

² Using data for a large sample of 73,500 firms in Italia over the period 2000–2007, Moretti (2014) finds that positive and significant effects of financial depth on productivity become stronger when the level of socio-institutional quality is high.

³ More details of political, legal and financial instiutions are presented in the Appendix.

⁴ Following Berry et al. (2012) and C. Li and Tanna (2019), we use the method of Brambor et al. (2006) to show the magnitude of the estimated effects in Figure 2 which reveals the marginal effects of corporate debt (debt to equity ratio) on TFP (as well as 95% confidence intervals) for different levels of financial institution and fitench-supporting instituion. These are based on the estimates reported in columns 7 and 8 of Table 3. The marginal effects are calculated using the derivative, $\mathit{dy}/\mathit{dx}={\beta }_1+{\beta }_2\ast \mathit{institutionalquality}$, evaluated at all values of institutional quality, with ${\beta }_1$ and ${\beta }_2$ being the corporate debt estimates of the constitutive and interaction terms respectively.

⁵ Using instrumental variable (IV) estimation is admittedly a more appropriate approach to tackle the endogeneity issue. However, finding proper instruments is generally difficult and we lack adequate firm-level data to create such IVs.

Additional information

Funding

This work was supported by the University Research Projects of Philosophy and Social Sciences in Jiangsu Province (Grant no. 2020SJA1210) and the Humanities and Social Sciences Youth Foundation of Ministry of Education in China (Grant no. 22YJCGJW004)

Notes on contributors

Chengchun Li

Chengchun Li, is an Associate Professor in Finance at Changshu Institute of Technology, China. He earned a PhD in Economics from Coventry University. His research interests are international economics and corporate governance.

Huanhuan Lu

Huanhuan Lu, is a master’s student at Business School, Changzhou University, China. Her field of interest is corporate finance.

Min Wu

Min Wu, is a senior accountant working at Wuxi Hekang Medical Clinic. She obtained a Master's Degree in Finance from Southeast University, China.

Da Teng

Da Teng, is an Associate Professor at the Faculty of Economics and Management, Beijing University of Chemical Technology. He holds a PhD degree from King's College London. His research focuses on international business, anti-corruption, and corporate governance in emerging economies.