The Effect Of Fiscal Policies On Dynamic Capital Structure:a Study From Chinese Listed Companies

Capital structure decision is an important part of firm’s financial management. And for the long time, scholars keep trying to resolve the so called "puzzle of capital structure". Until now, the capital structure theories have been going through three stages of development:the traditional capital structure theory, the modern capital structure theory and the new capital structure theory. Meanwhile, there comes out a great number of empirical tests to verify different capital structure theories. And one of the major research fields is about the determinants of capital structure. Over the years, scholars come to realize that the capital structure is not only affected by a series of firm characteristics, but also will be affected by the macroeconomic policies. And the research methods also changed from the static model to the dynamic model, which generate a number of researches about the dynamic adjustment of capital structure. This paper focuses on the fiscal policies, one part of the macroeconomic policies, and applies the dynamic adjustment model of capital structure to investigate the effects of fiscal policies on the dynamic adjustment of firms’ capital structure. The study can not only help us have a better understanding about firms’financial behavior, but also test the effect of the macroeconomic policy.The paper chose624Chinese firms which listed in Shanghai and Shenzhen stock exchanges as A-share for sample, and collected their capital structure and financial data between2003and2012. It also gathered the data of China’s Enterprise Income Tax and government spending in the same sample period. Then we use these panel data to do empirical tests by applying them into the partial adjustment model of capital structure. We chose the firms’ quarterly average debt ratios and industries’ annual average debt ratios as target capital structure. The empirical results show that fiscal policies do affect firm’s target capital structure. The decrease of Enterprise Income Tax rate will significantly lower firms’quarterly average debt ratios. However, the increase of government spending will significantly increase both firms’quarterly average debt rations and industry’s annual average debt ratios. Moreover, the firms’capital structure is mean-reverting and fiscal policy also affects the adjustment speed of firms’ capital structure towards its average. The more the Enterprise Income Tax revenue increases, the slower the capital structure adjusts towards its quarterly average; while the more the government spending increases, the faster the firms’ capital structure adjusts towards its quarterly average and industry annual average. And both the results are significant.Furthermore, the empirical tests also demonstrate that firms’ size, profitability, growth, tangibility, non-debt tax shields, bankruptcy risk and industry characteristic significantly affect firms’capital structure. And the distance between firms’real debt ratio and their target debt ratio as well as the firms’size and growth have a significant positive impact on firms’capital structure adjustment speed.