Can Digital Finance Help Firms to Reduce Their Over-Indebtedness? Evidence from Chinese Listed Companies

Abstract

A long-standing firm over-indebtedness can result in firm default. Understanding firms’ over-indebtedness has crucial academic and practical significance. Using a sample of Chinese A-listed companies from 2012 to 2021, this paper employs a fixed-effect panel model to show the empirical evidence of the influence of digital finance on firms’ over-indebtedness. The digital inclusive finance index developed by PKU-DFIIC is used to measure digital finance development. The baseline results show that digital finance development significantly reduces firms’ over-indebtedness. The results remain robust across a series of robustness tests. The intrinsic mechanism suggests that digital finance reduces firms’ over-indebtedness by alleviating financing constraints and improving stock liquidity. The heterogeneity results show that digital finance has greater inhibitory effects for firms with large size, strong corporate governance, private ownership, non-high tech, and competitive industry, and location in eastern regions and high marketization areas. The findings of this paper offer considerable practical implications to reveal the impact of digital finance at the micro level and improve the quality of decision-making for managers, investors, analysts, regulators, and financial institutions.

Keywords: Digital finance, financing constraints, over-indebtedness, stock liquidity, excessive leverage