Abstract: The findings of this study, which makes use of the provincial panel data from 2011 to 2016 and the cross samples of the data of listed companies, show that local government debt leads to a decline in corporate innovation, which is reflected in the reduced amount of patent applications and patent grants in regions with severe problems of local government debt. The testing result of the regulatory effect shows that non-state-owned enterprises have received stronger innovation inhibition in the regions with serious local debt problems, that the political connections of some non-state-owned enterprises have mitigated the damage of local debt to the enterprise innovations, and that the enterprise innovation of the industries with higher levels of external financing dependence is negatively and significantly affected by the local debts. In accordance with the No.43 document of the State Council, this paper constructs a DID model to carry out a test, the result shows that the governance of local debts can play a role in improving enterprise innovations. The result of an examination of the mechanisms indicates that the governance of local debts has improved the efficiency of credit allocation and reduced the negative impact of financing constrain on enterprise innovation.

Key words: local debt management; credit allocation efficiency; enterprise innovation; difference-in-difference