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Taxation and capital structure: Empirical evidence from a quasi-experiment in China

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  • An, Zhiyong
Abstract
China's new Corporate Income Tax Law was passed in March 2007 and took effect on January 1, 2008. It terminated the dual corporate income tax regime by removing the preferential tax treatments offered to foreign investment enterprises (FIEs) and unifying the corporate income tax regime for FIEs and Chinese domestic enterprises (DEs). This paper uses a difference-in-differences approach to determine whether FIEs responded to the law by raising debt ratios. Employing the Chinese Industrial Enterprises Database from 2002 to 2008 to implement the analysis, we find that FIEs have responded to the law by raising debt ratios; the treatment effect is larger for Hong Kong–Macau–Taiwan (HMT) investment enterprises than for other FIEs, which implies that HMT investment enterprises are more sensitive and more responsive to the removal of the preferential tax treatments than other FIEs; and the treatment effect by restricting the control group to State-Owned Enterprises (SOEs) is less than that by restricting the control group to Private-Owned Enterprises (POEs), which is consistent with the perception that SOEs might enjoy more favorable treatments from the Chinese government than POEs. All three findings are consistent with the tax-based theories of capital structure, and hence we conclude that taxation plays an important role in the choice of capital structure. We argue that our conclusion is not China-specific, but a general lesson for modern finance theory and is portable to developed countries.

Suggested Citation

  • An, Zhiyong, 2012. "Taxation and capital structure: Empirical evidence from a quasi-experiment in China," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 683-689.
    • Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:683-689
    DOI: 10.1016/j.jcorpfin.2012.04.002
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    5. Clemens Fuest & Li Liu, 2015. "Does Ownership Affect the Impact of Taxes on Firm Behavior? Evidence from China," CESifo Working Paper Series 5316, CESifo.
    6. Anoshkina, Ekaterina S. (Аношкина, Екатерина) & Markovskaya, Elizaveta I. (Марковская, Елизавета), 2018. "Empirical Analysis of Capital Structure Determinants of Russian Oil and Gas Companies [Анализ Структуры Капитала Российских Компаний Нефтегазового Сектора]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 80-109, October.
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    13. Zhiyong An & Yilin Hou, 2020. "Debt authority and intentional overstatement of budgetary deficit: evidence from Chinese Provinces," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(2), pages 461-477, April.
    14. José A. Clemente-Almendros & Francisco Sogorb-Mira, 2016. "The effect of taxes on the debt policy of spanish listed companies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(3), pages 359-391, August.
    15. Tang, Meili & Wang, Yu, 2022. "Tax incentives and corporate social responsibility: The role of cash savings from accelerated depreciation policy," Economic Modelling, Elsevier, vol. 116(C).
    16. Nihal Bayraktar, 2013. "Foreign Direct investment and Investment Climate," EcoMod2013 5294, EcoMod.
    17. Temimi, Akram & Zeitun, Rami & Mimouni, Karim, 2016. "How does the tax status of a country impact capital structure? Evidence from the GCC region," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 71-89.
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    19. Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
    20. Peng, Fei & Peng, Langchuan & Wang, Zheng, 2021. "How do VAT reforms in the service sectors impact TFP in the manufacturing sector: Firm-level evidence from China," Economic Modelling, Elsevier, vol. 99(C).
    21. Peng, Fei & Wang, Ling & Peng, Langchuan & Wu, Huaqing, 2023. "Local government fiscal squeeze, environmental regulation and firms’ polluting behavior: Evidence from China," Economic Modelling, Elsevier, vol. 125(C).
    22. Xu, Fei & Liu, Qian & Zheng, Xingdong & Cao, Luqi & Yang, Mian, 2022. "Research on the impact of China's high-speed rail opening on enterprise market power: Based on the perspective of market segmentation," Transport Policy, Elsevier, vol. 128(C), pages 121-137.
    23. An Zhiyong & Hou Yilin, 2019. "Population Policy, Demographic Change, and Firm Returns: Evidence from China," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 19(1), pages 1-11, January.
    24. Sharvesh Digumber & Hemavadi Soondram & Bhavish Jugurnath, 2017. "Tax Policy and Foreign Direct Investment: Empirical Evidence from Mauritius," International Business Research, Canadian Center of Science and Education, vol. 10(3), pages 42-56, March.

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    More about this item

    Keywords

    Taxation; Capital structure; Trade-off theory; China;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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