The Effect Of Taxes On Corporate Capital Structure

Since the birth of MM theorem in1958, more and more western economists study on this field. The research generally supports the fact that taxes do affect corporate capital structure. However, in China the study on the effect of taxes on corporate capital structure is still in the primary stage, and most researchers just adopt qualitative analysis on this field. This thesis systematically analyses how taxes affect corporate capital structure of Chinese Listed Companies by adopting theoretical analysis and empirical analysis. The aim is to provide empirical evidences for Status quo of Capital Structure of the listed companies in China, which also provide theoretical basis for relevant tax policies making and improving by government department to optimize capital structure of Chinese listed companies.Based on the results of foreign theoretical and empirical research, this thesis firstly builds a "balance" theoretical pattern by weighing the benefits (tax deducibility of interest payment)and costs(potential bankruptcy costs)of debt financing. Next, by analyzing how taxes affect corporate capital structure choice in China, thesis finds that tax system in China does not encourage debt financing. Then empirical model is constructed to examine the effect of taxes on corporate capital structure by introducing the variables including the variables(tax rate and non-debt tax shields) and non-tax control variables from theoretical pattern. Using the panel data of Chinese Listed Companies, the results of the regressions are consistent with the above analysis. Finally, according to the conclusions of the theoretical and empirical analysis, me thesis puts forward some suggestions of tax policies to optimize capital structure of Chinese listed companies. The empirical study of this thesis uses the debt level regression and the debt change regression. In the level regression, the effect of non-debt tax shields is significant; and in the change regression, the effect of tax rate is significant, but both magnitudes seem small, namely, the effect of taxes on capital Structure is not big.