Government debt, government ownership, and corporate cash dividends

Abstract

This paper investigates the joint effect of government debt and government ownership on corporate dividends, using data on local government debt and A-share listed companies in China. We find that excessive local government debt leads to higher cash dividends of local state-owned enterprises (SOEs), indicating that under great debt pressure, local governments tend to demand high cash dividends from local SOEs. When there is significant government debt, local governments prioritize easing urgent debt burdens to meet the central government's evaluation criteria, lower financing costs, and reduce media scrutiny. We further show that SOEs accommodate these demands by cutting R&D expenditures and operating expenses while increasing bank debt. In fact, government debt is largely converted into SOE bank loans. Finally, we find that high SOE cash dividends enable local governments to scale back bond issuance for refinancing maturing implicit government debt and narrow the interest spread of newly issued government debt.

Keywords: Government debt, government ownership, cash dividends, debt repayment pressure JEL classification codes: H74, H71, G32, G35