Government Intervention in Credit Allocation Process and Leverage Dynamics : Evidence from China

We study how government intervention in the bank loan granting process affects firms’ leverage dynamics. We exploit the setup of administrative approval centers (AACs) in China, a program aiming to reduce bureaucracy in business activities, as a quasi-natural experiment. On average, AACs help to shorten the leverage rebalancing period by as much as a quarter. This acceleration pattern persists in under-leveraged firms, which issue more debt to rebalance accordingly. Cross-sectional analyses show that the positive effect of AACs on leverage adjustment is more pronounced for firms that are in poorer legal environment, with more financial constraints, or less politically connected. ics