Impact of technological innovation on corporate leverage in China: The moderating role of policy incentives and market competition

Due to its capital-related nature, corporate leverage is highly exposed to financial risk, and optimizing corporate leverage is an effective method of mitigating financial risk to maximize corporate value. We use a two-way fixed effects model to examine the impact of technological innovation on corporate leverage using panel data of A-share listed companies in the Chinese manufacturing sector from 2012 to 2020. The results show that technological innovation and corporate leverage exhibit significant heterogeneity in cross-sectional, spatial and temporal dimensions. By further distinguishing between the effects of policy incentives and market competition, we find that the former exerts an “investment crowding out” effect and the latter an “innovation spillover” effect. These factors mitigate the negative relationship between technological innovation and corporate leverage. In general, this study provides empirical evidence for the rational allocation of resources by the Chinese government, the development of innovation capabilities, and the adjustment of leverage by firms from various regions.