Skip to main content
SpringerLink
Log in

Tax incentives and firm financing structures: evidence from China’s accelerated depreciation policy

  • Published:
International Tax and Public Finance Aims and scope Submit manuscript

Abstract

This study used China’s accelerated depreciation policy (2014–2015) as an exogenous shock to examine the impact of tax incentives on firm financing structures. Based on data from China’s A-share listed companies from 2010 to 2017, we estimated a difference-in-differences model and found that the accelerated depreciation policy increased firms’ liability–asset ratio. Moreover, this rise was mainly seen in firms’ current liability–asset ratio (i.e., short-term leverage), while long-term leverage remained stable, which shortened firms’ debt maturity. The mechanism exploration showed that the accelerated depreciation policy stimulated fixed asset investment, and this investment increase was mainly financed by short-term debt, leading to greater maturity mismatch between firm assets and liabilities. Further heterogeneity analysis showed that the observed rise in short-term leverage was more serious among firms that were less likely to be allocated long-term credit from banks, including small-sized firms and those with a low share of tangible assets.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6

Similar content being viewed by others

Notes

  1. For a more detailed timeline of VAT reform, please see Cai and Harrison (2011) and Liu and Lu (2015).

  2. For a more detailed timeline of reforms to simplify the tax rate structure of VAT, please see Liu et al. (2019).

  3. For a more detailed timeline of the BT-VAT reform policy, please see Yu and Qi (2022).

References

  • Agrawal, A., Rosell, C., & Simcoe, T. (2020). Tax credits and small firm R&D spending. American Economic Journal: Economic Policy, 12(2), 1–21.

    Google Scholar 

  • Allen, F., Qian, J., & Qian, M. (2005). Law, finance, and economic growth in China. Journal of Financial Economics, 77(1), 57–116.

    Article  Google Scholar 

  • Bailey, W., Huang, W., & Yang, Z. (2011). Bank loans with Chinese characteristics: Some evidence on inside debt in a state-controlled banking system. Social Science Electronic Publishing, 46(6), 1795–1830.

    Google Scholar 

  • Barclay, M. J., & Smith, C. W. (1995). The maturity structure of corporate debt. Journal of Finance, 50(2), 609–631.

    Article  Google Scholar 

  • Beck, T., Demirguc-Kunt, A., & Maksimovic, V. (2004). Bank competition and access to finance: International evidence. Journal of Money, Credit and Banking, 36(3b), 627–648.

    Article  Google Scholar 

  • Brennan, M. J., & Schwartz, E. S. (1978). Corporate income taxes, valuation, and the problem of optimal capital structure. Journal of Business, 51(1), 103–114.

    Article  Google Scholar 

  • Cai, J., & Harrison, A. (2011). The value-added tax reform puzzle. National Bureau of Economic Research.

  • Chen, Z., Jiang, X., Liu, Z., Serrato, J., & Xu, D. Y. (2022). Tax policy and lumpy investment behavior: evidence from China’s VAT reform. The Review of Economic Studies, 4.

  • Chen, Z., Liu, Z., Serrato, J., & Xu, D. Y. (2021). Notching R&D investment with corporate income tax cuts in China. American Economic Review, 111(7), 2065–2100.

    Article  Google Scholar 

  • Dammon, R. M., & Senbet, L. W. (1988). The effect of taxes and depreciation on corporate investment and financial leverage. The Journal of Finance, 43(2), 357–373.

    Article  Google Scholar 

  • Deangelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8(1), 3–29.

    Article  Google Scholar 

  • Deng, K., Zhu, Y., Smith, T., & McCrystal, A. (2020). Tax and leverage: Evidence from China. China Economic Review, 62, 101479.

    Article  Google Scholar 

  • Dhaliwal, D., Trezevant, R., & Wang, S. W. (1992). Taxes, investment-related tax shields and capital structure. Journal of the American Taxation Association, 14(1), 1–21.

    Google Scholar 

  • Donohue, J., Daniel, E. H., & Patrick, L. (2004). Do police reduce crime? Estimates using the allocation of police forces after a terrorist attack. American Economic Review, 94(1), 115–133.

    Article  Google Scholar 

  • Dwenger, N., & Steiner, V. (2014). Financial leverage and corporate taxation: Evidence from German corporate tax return data. International Tax and Public Finance, 21(1), 1–28.

    Article  Google Scholar 

  • Eisner, R. (1969). Tax policy and investment behavior: Comment. American Economic Review, 59(3), 370–379.

    Google Scholar 

  • Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), 277–300.

    Article  Google Scholar 

  • Fan, J., Titman, S., & Twite, G. (2012). An international comparison of capital structure and debt maturity choices. Journal of Financial and Quantitative Analysis, 47(1), 23–56.

    Article  Google Scholar 

  • Fan, W., & Hu, M. (2020). Accelerated depreciation policy and short-term debt for long-term investment. Economic Management (in Chinese), 42(10), 18.

    Google Scholar 

  • Fan, Z., & Liu, Y. (2020). Tax compliance and investment incentives: Firm responses to accelerated depreciation in China. Journal of Economic Behavior & Organization, 176, 1–17.

    Article  Google Scholar 

  • Givoly, D., Hayn, C., Ofer, A. R., & Sarig, O. (1992). Taxes and capital structure: Evidence from firms’ response to the tax reform act of 1986. Review of Financial Studies, 2, 331–355.

    Article  Google Scholar 

  • Heider, F., & Ljungqvist, A. (2015). As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes. Journal of Financial Economics, 118(3), 684–712.

    Article  Google Scholar 

  • Jacobson, L. S., & Sullivan, L. L. G. (1993). Earnings losses of displaced workers. American Economic Review, 83, 685–709.

    Google Scholar 

  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Management behavior, agency cost and ownership structure. Social Science Electronic Publishing, 3(4), 305–360.

    Google Scholar 

  • Jorgenson, H. (1967). Tax policy and investment behavior. American Economic Review, 57(3), 391–414.

    Google Scholar 

  • Lan, F., Wang, W., & Cao, Q. (2020). Tax cuts and enterprises’ R&D intensity: Evidence from a natural experiment in China. Economic Modelling, 89, 304–314.

    Article  Google Scholar 

  • Leland, H. E., & Toft, K. B. (1996). Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads. Journal of Finance, 51(3), 987–1019.

    Article  Google Scholar 

  • Litzenberger, K. R. H. (1973). A state-preference model of optimal financial leverage. Journal of Finance, 28(4), 911–922.

    Article  Google Scholar 

  • Liu, B., Kou, E., & Yang, L. (2019a). Multiple VAT tax rates, resource misallocation and total factor production loss. Economic Research Journal (in Chinese), 5, 113–128.

    Google Scholar 

  • Liu, H., Kangtao, Y. E., & Lu, Z. F. (2019b). Accelerated depreciation policy and firm investment—evidence from a quasi-natural experiment in China. China Economic Quarterly, 18(1), 213–233.

    Google Scholar 

  • Liu, Q., & Lu, Y. (2015). Firm investment and exporting: Evidence from China’s value-added tax reform. Journal of International Economics, 97(2), 392–403.

    Article  Google Scholar 

  • Ma, J., Guo, M., & Li, Z. (2013). Bank competition, agency costs and borrowing term structure: Empirical evidence from Chinese listed companies (in Chinese). Journal of Financial Research, 4, 75–88.

    Google Scholar 

  • Maffini, G., Xing, J., & Devereux, M. P. (2019). The impact of investment incentives: Evidence from UK corporation tax returns. American Economic Journal: Economic Policy, 11(3), 361–389.

    Google Scholar 

  • Miller, M. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(3), 433–443.

    Google Scholar 

  • Miller, M. H. (1977). Debt and taxes. Journal of Finance, 32(2), 261–275.

    Google Scholar 

  • Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(3), 261–297.

    Google Scholar 

  • Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics., 13(2), 187–221.

    Article  Google Scholar 

  • Nie, H., Fang, M., & Li, T. (2010). China’s value-added tax reform, firm behavior, and performance. Frontiers of Economics in China, 5(3), 445–463.

    Article  Google Scholar 

  • Peng, F., Peng, L., & Wang, Z. (2021). How do VAT reforms in the service sectors impact TFP in the manufacturing sector: Firm-level evidence from China. Economic Modelling, 99, 1–2.

    Article  Google Scholar 

  • Porta, R. L., & Shleifer, A. (2002). Government ownership of banks. Journal of Finance, 57(1), 265–301.

    Article  Google Scholar 

  • Rao, N. (2016). Do tax credits stimulate R&D spending? The effect of the R&D tax credit in its first decade. Journal of Public Economics, 140, 1–12.

    Article  Google Scholar 

  • Robichek, A., & Myers, S. (1966). Problems in the theory of optimal capital structure. Journal of Financial and Quantitative Analysis, 1(2), 1–35.

    Article  Google Scholar 

  • Ross, S. A. (1977). The determination of financial structure: The incentive-signalling approach. Bell Journal of Economics, 8(1), 23–40.

    Article  Google Scholar 

  • Stein, J. C. (2003). Chapter 2: Agency, information and corporate investment. Handbook of the Economics of Finance, 1, 111–165.

    Article  Google Scholar 

  • Steinmüller, E., Thunecke, G. U., & Wamser, G. (2019). Corporate income taxes around the world: A survey on forward-looking tax measures and two applications. International Tax and Public Finance, 26(2), 418–456.

    Article  Google Scholar 

  • Tuzel, S., & Zhang, M. B. (2019). Economic stimulus at the expense of routine-task jobs. SSRN working paper 3072733.

  • Xu, B., Rixtel, A. V., & Leuvensteijn, M. V. (2016). Measuring bank competition under binding interest rate regulation: The case of China. Applied Economics, 48(49), 4699–4718.

    Article  Google Scholar 

  • Yu, J., & Qi, Y. (2022). BT-to-VAT reform and firm productivity: Evidence from a quasi-experiment in China. China Economic Review, 71, 101740.

    Article  Google Scholar 

  • Zhang, L., Chen, Y., & He, Z. (2011). The effect of investment tax incentives: Evidence from China’s value-added tax reform. International Tax & Public Finance, 25(4), 913–945.

    Article  Google Scholar 

  • Zhong, K., Cheng, X., & Zhang, W. (2016). Monetary policy, information transparency and the term structure of corporate credit (in Chinese). Finance & Trade Economics, 37(3), 60–77.

    Google Scholar 

  • Zou, J., Shen, G., & Shen, Y. (2019). The effect of value-added tax on leverage: Evidence from china’s value-added tax reform. China Economic Review, 54, 135–146.

    Article  Google Scholar 

  • Zwick, E., & Mahon, J. (2017). Tax policy and heterogeneous investment behavior. American Economic Review, 107(1), 217–248.

    Article  Google Scholar 

Download references

Acknowledgements

We are grateful for the financial support provided by the National Natural Science Foundation of China (No. 72273157).

Author information

Authors and Affiliations

  1. Renmin University of China, Beijing, China

    Jiayi Du & Guangjun Shen

  2. National Academy of Development and Strategy, Renmin University of China, Beijing, China

    Jingxian Zou

Authors
  1. Jiayi Du
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Guangjun Shen
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Jingxian Zou
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jingxian Zou.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Table 3.

Rights and permissions

Springer Nature or its licensor holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Du, J., Shen, G. & Zou, J. Tax incentives and firm financing structures: evidence from China’s accelerated depreciation policy. Int Tax Public Finance 30, 1346–1373 (2023). https://doi.org/10.1007/s10797-022-09762-w

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10797-022-09762-w

Keywords

JEL Classification

Search

Navigation