Impact of Financial Distress on the Capital Expenditure of Local Enterprises

Abstract

This study defines financially distressed enterprises based on stock delisting risk warnings and uses the annual data of A-share listed companies on the Shanghai and Shenzhen stock exchanges from 2008 to 2021 to examine the impact and mechanism of financial distress on the capital expenditures of non-distressed enterprises in the same city. The results indicate that if financially distressed enterprises exist within a city, the capital expenditure of non-distressed enterprises within the same city will subsequently decrease. The conclusions hold after multiple robustness and endogeneity tests. Mechanism tests show that financially distressed enterprises reduce the operating performance and cash flow of non-distressed enterprises in the same city through business performance contagion, thereby reducing their intrinsic motivation for capital expenditure. However, financial distress enhances creditors’ credit risk perceptions of non-distressed enterprises in the same city through signal transmission effects, prompting creditors to tighten credit contracts or directly intervene in corporate capital expenditure decisions, thus suppressing corporate capital expenditure. Heterogeneity tests indicate that the smaller the asset size of non-distressed enterprises, the larger the scale of financially distressed enterprises relative to non-distressed enterprises in the same city, or the more severe the agency problem of non-distressed enterprises or degree of financial distress, the more significant the negative externality of financial distress on the capital expenditures of local enterprises. The economic consequences test shows that the reduction effect of financial distress on the capital expenditure of non-distressed enterprises in the same city ultimately improves their capital expenditure efficiency.