Public Health Insurance and Firm Leverage

Abstract

We investigate the impact of public health insurance on firm leverage. To establish causality, we exploit a policy-induced exogenous shock in the implementation of Chinese national public health insurance program starting in 2007, which is Urban Resident Basic Medical Insurance (URBMI). Using a difference-in-differences approach, we find that Chinese listed firms in pilot cities implementing the URBMI program maintain higher leverage ratios than those in non-pilot cities. Employee lock-in and risk tolerance are the plausible mechanisms through which public health insurance affects corporate leverage. This study sheds light on the effects of public health insurance on firm financing decisions.

Keywords: public health insurance, firm leverage, employee lock-in, employee risk tolerance