Unintended consequences of market deregulation: a perspective from corporate leverage manipulation

This study examines the unintended consequences of market deregulation on corporate leverage manipulation, exploiting China’s Negative List System for Market Access Reform as a quasi-natural experiment. We find market deregulation increases firms’ leverage manipulation by reducing covenant slack. The effect is more pronounced among firms in more competitive industries, firms facing greater refinancing pressure, and firms subject to weaker bank monitoring. Further analyses indicate leverage manipulation misleads creditors, expands firms’ access to credit, and heightens subsequent default risk. Overall, our findings highlight that market deregulation may unintentionally induce financial reporting distortions and generate adverse credit market consequences.