Social insurance contributions and firms' debt concentration choice: A quasi-natural experiment based on the implementation of China's social insurance law

Using the implementation of China's 2011 Social Insurance Law as a quasi-natural experiment, we apply a difference-in-differences model to test the effect of social insurance contributions on firms' debt concentration choices. We find that when social insurance contributions increase, firms choose a debt structure with a higher concentration and fewer types of debt. Additional analyses show that this relationship is more pronounced in the sample in which firms have higher default risk, lower liquidation value, and lower accounting quality. A relatively concentrated debt structure enables firms to better negotiate with creditors to increase the probability of renegotiating debt with creditors and reduce the resulting bankruptcy liquidation. These results suggest that an increase in social insurance contributions leads to higher financial costs. Firms adjust their debt concentration when they need to renegotiate debt terms with their creditors in view of the higher probability of debt default. We examine the economic consequences of an increase in social insurance contributions from the perspective of a firm's debt concentration adjustment.