Leverage manipulation is a common practice employed by firms to circumvent regulation and windowdress their financial conditions. The resultant accumulation of hidden debt risk has become a significant threat to the stable operation and highquality development of capital markets. Using a sample of nonfinancial listed companies of Ashare in China from 2007 to 2022, this paper empirically examines the impact of leverage manipulation on the cost of equity capital and its underlying mechanisms. The findings indicate that a higher degree of leverage manipulation is associated with a higher cost of equity. Mechanism analysis reveals that leverage manipulation drives up the risk premium demanded by investors by reducing information transparency and exacerbating information asymmetry. Heterogeneity analysis shows that this effect is more pronounced among firms with lower default risk, higher growth potential, and those receiving standard unqualified opinions. Further analysis demonstrates that greater leverage manipulation is associated with lower investment efficiency and a smaller labor income share, aggravating factor allocation imbalances and eroding the material foundation of common prosperity at the micro level. This study can provide empirical evidence and decisionmaking references for strengthening accounting supervision of listed companies, improving the quality of information disclosure, promoting the entry of mediumand longterm funds into the market, and facilitating highquality economic development.