Capital Structure Impact Of Changes In Corporate Income Tax Rate

Since the financial crisis in 2008,China has experienced three times of adding leverage and has no room for more debt.The leverage ratio has reached 166.3% of non-financial enterprises in our country in 2016,though,after 2017 non-financial companies leverage growth tends to be stable,but we still need to adhere to seek improvement in stability,further control corporate leverage.The central economic work conference in 2019 made it clear that we need to fight hard to prevent and defuse major risks and stick to the basic idea of structural deleveraging.With the arrival of trump's tax reform and the global wave of tax cuts,it is an important topic to study how the corporate income tax,the second largest tax category,affects the leverage ratio of Chinese enterprises.The MM theory,which originated in the last century,suggests that the debt tax shield can reduce the capital cost of corporate debt financing.Can this theory also support lower tax rate deleveraging? China's corporate income tax reform in 2008 naturally formed enterprises with the tax rate rising,the tax rate unchanged and the tax rate decreasing.This paper will see it as a quasi-natural experiment Based on this,systematically study the relationship between the change of corporate income tax rate and the capital structure,and put forward suggestions for China's structural deleveraging.This paper first theoretically discusses the overall impact of corporate income tax changes on the capital structure of enterprises,and then makes a detailed analysis of heterogeneity based on the property right nature,region,marketization degree and financing constraints of enterprises.Five hypotheses are proposed: Hypothesis 1 after the enterprise income tax reform,compared with enterprises with unchanged tax rate,enterprises with lower tax rate will significantly reduce the asset-liability ratio;enterprises with a higher tax rate will significantly increase their asset-liability ratio compared with enterprises with the same tax rate.Hypothesis 2 the reduction of tax rate has a higher significance on the reduction of asset-liability ratio of state-owned enterprises than that of non-state-owned enterprises.Hypothesis 3 the change of corporate income tax rate has a greater impact on the capital structure of non-eastern enterprises than that of eastern enterprises.Hypothesis 4 the impact of corporate income tax rate change on the capital structure of enterprises with lower marketization degree is greater than that of enterprises with higher marketization degree.Hypothesis 5 the impact of corporate income tax rate change on capital structure of enterprises with strong financing constraints is greater than that of enterprises with weak financing constraints.On empirical analysis,this article chooses China's enterprise income tax reform in 2008 as quasi natural experiment by using DID model.According to A-share listed companies' consolidated financial statements between 2003 to 2011,this paper uses the applicable tax rate changes,setting the unchanged companies as control group,rising and falling companies as treatment group.Then it makes a test of hypothesis,and makes a series of robustness tests.The research finds that: first,on the whole,enterprises with a rising tax rate significantly increase their asset-liability ratio,while enterprises with a falling tax rate significantly reduce their asset-liability ratio,which proves the debt tax shield effect.Second,dynamically,the positive correlation between corporate income tax rate changes and asset-liability ratio starts to be significant in the second year of the reform,and then declines until it disappears.Third,the impact of tax rate change on asset-liability ratio of state-owned enterprises is more significant than that of non-state-owned enterprises,and tax rate reduction is more effective for state-owned enterprises to deleverage.Fourth,the change of corporate tax rate in non-eastern regions has a more significant impact on the reduction of asset-liability ratio than that in eastern regions,and the reduction of tax rate is more effective for enterprises in non-eastern regions to deleverage.Fifth,the change of corporate tax rate in regions with a low degree of marketization has a more significant impact on asset-liability ratio than those with a high degree of marketization,and the reduction of tax rate is more effective for enterprises in regions with a low degree of marketization to deleverage.Sixth,the change of corporate tax rate in regions with high financing constraints has a more significant impact on the asset-liability ratio than that in regions with low financing constraints,and the reduction of tax rate is more effective for enterprises with high financing constraints to deleverage.The policy suggestions are as follows: First,reduce the corporate income tax to promote deleveraging of enterprises.Second,put forward tax reduction of state-owned enterprises to solve the problem of "zombie enterprises and ease the soft budget constraint of government.Third,the reform to reduce the corporate income tax can be inclined to the northeast,middle and western regions,and to the provinces with low degree of marketization and strong financing constraints,so as to enhance the profitability of enterprises,the ability of internal financing and equity financing.Forth,combine tax policy with other policies to promote the healthy development of the financial market.