With the sample of A-shared local state-owned listed companies in China from 2001 to 2009, this paper makes a research on the sources of non-efficient investment funds in local stated-owned enterprises. We find that non-efficient investment funds in the local state-owned companies first comes from debt capital, followed by equity capital; and the equity capital is more inclined to be replaced by debt capital in the companies with more long term loans, which is rational and irreversible. Further, companies have stronger motivation to replace equity capital by debt capital in the area with a higher level of investor protection and a lower level of marketization of credit allocation. And in the area where there exists stronger local governments intervention , the role of debt capital replacing equity capital is weakening.