**5. Discussion**

The relationship between bank credit and firm innovation has perplexed scholars for a long time. Shahzad et al. (2021) found evidence of an inverted U-shaped relationship between debt financing and corporate innovation, which implies that firms undertaking excessive debts over an optimum debt point may be detrimental to firm innovation [42]. In this study, we refine Shahzad et al. (2021)'s work by identifying and measuring the amount of SOEs overborrowing under China's administrative-economic governance mode. We provide an explanation for SOEs insufficient R&D expenditure, taking into account the corporate governance in transition economies.

More specifically, the indulgence effect of overborrowing urges top managers in SOEs to give up valuable R&D investment opportunities and choose a relatively "safe" policy, lowering R&D expenditure. According to our estimates, SOEs' indulgence effect reduces firm R&D investment intensity by about 3.18 percentage points. Despite the indulgence effect in SOEs, we find higher level political connections and R&D functional experience help mitigate the risk aversion of managers. As shown in the moderating analysis, the improvement in monitoring associated with a higher level of political connections can efficiently reduce the overall overborrowing and alleviate the adverse effects of overborrowing. In addition, managers with relevant R&D functional experience can also make up for the disadvantages of SOEs' overborrowing, highlighting that managers' specific intellectual capital might be a priority in the corporate governance reform of SOEs.

Our findings contribute to a growing empirical literature on a firm's corporate governance in the following ways. Firstly, they expand the understanding of the debt governance

role for innovation in transition economies. Existing studies draw inconsistent conclusions about debt's role in firms' innovation [42,115]. Focusing on the interplay of internal and external governance under administrative-economic governance, we reveal and examine the potential governance mechanism of overborrowing between a firm's state ownership and R&D expenditure. Our research further provides one possible explanation of a firm's innovation investment insufficiency. Secondly, it contributes to the present studies on government intervention and its economic consequences. In addition to the problem of overinvestment documented within the extant literature [116,117], our study demonstrates an excessive debt channel through which government intervention has a significantly negative impact on firm innovation.

Our research, therefore, has some practical implications for SOEs to improve innovation by increasing the proportion of technological managers or directors and giving them more power on technical strategy and discretion on R&D spending. For example, SOEs can set a technology committee at the board level. As a counterpart, local firms need to further improve internal monitoring on the politically connected directors to better reduce the agency costs. The promotion assessment for local SOEs' officials should be comprehensive and sustainability-oriented. In addition, during promoting the innovation of SOEs, the reform of external governance (such as the board diversity and ownership diversification of banks) is also indispensable. In other words, restricting ineffectual intervention in financial institutions can help optimize R&D resource allocation, thereby improving firm innovation capacity.

This study could be viewed as a preliminary step in a comprehensive evaluation of how overborrowing affects the innovation of SOEs. It is indeed a preliminary research because our methodology directly estimates the firm's overborrowing by the residual of the OLS regression model. Alternative strategies of estimating the overborrowing of firms, either by focusing on the counter-cyclical character of discretional fiscal policy made by the government, or by directly calculating the firm's position changes in commercial banks, would be highly complementary to this approach. In addition, except for overborrowing between SOEs and non-SOEs, whether and to what extent the overborrowing among SOEs and other types of firms (Privately Owned Enterprises, Collectively Owned Enterprises and Foreign-Invested Enterprises) influences firms' innovation still needs careful investigation and examination, which will allow a more efficient use of the available innovation resources across different types of firms.

**Author Contributions:** Conceptualization, W.L. and Q.M.; Methodology, Q.M.; Writing–Original Draft Preparation, Y.L.; Writing–Review & Editing, M.Y.; Funding Acquisition, W.L. All authors have read and agreed to the published version of the manuscript.

**Funding:** This study was funded by the National Natural Science Foundation of China, grant number 72174096.

**Institutional Review Board Statement:** Not applicable.

**Informed Consent Statement:** Not applicable.

**Data Availability Statement:** The data presented in this study are available on request from the corresponding author.

**Conflicts of Interest:** The authors declare no conflict of interest.

#### **Appendix A**


**Table A1.** Descriptive statistics of variables.

\* Here, we only count the companies whose chairman of the board or general manager has political connection and its administrative level can be identified.



**Table A3.** Variance inflation factors of variables.

