Abstract: The problem of local governments defaulting on payments to private enterprises has been a major obstacle on the road to building a new type of close and upright government-business relationship. Using the State Council's special supervisory action to clean up government arrears as a quasi-natural experiment, this paper applies the difference-in-difference method to systematically examine how the settlement of local government arrears exerts a positive social effect and influences the assumption of social responsibility by private firms, intending to provide empirical evidence on how the governance of government debt positively induces the private economy. The findings show that this special action has significantly improved the level of social responsibility of private enterprises in the supervised areas. This action has enhanced the willingness and ability of private enterprises to undertake social responsibility by increasing the public attention to them and alleviating their internal liquidity constraints, and has had a positive impact on corporate charitable donations. The heterogeneity test reveals that the above-mentioned effect is more significant in regions with lower social credit levels, poorer market environments, and in private enterprises that lack political connections. Therefore, in order to promote the healthy development of the non-public economy and build a new type of government-business relationship, the governance of local government arrears should be institutionalized and long-term. While building a service-oriented government, private enterprises should be encouraged to actively fulfill their social responsibilities and play a positive role in social development.

Key words: government debt management, corporate social responsibility, charitable donations, public concern, liquidity constraints