Social Security Contributions and Corporate Financing Decisions: Evidence from China’s Social Insurance Law

60 Pages Posted: 17 Apr 2020 Last revised: 16 Jun 2020

See all articles by Guanchun Liu

Guanchun Liu

Shanghai University of Finance and Economics - School of Public Economics & Administration

Yuanyuan Liu

Fudan University

Yueteng Zhu

New York University (NYU), Department of Economics, Students

Date Written: June 30, 2019

Abstract

This paper investigates whether social security contributions affect corporate financing decisions. Treating the 2011 Social Insurance Law in China as a quasi-natural experiment, our difference-in-differences framework utilizes two-dimension variations: initial social security contribution rates across firms (i.e., high relative to low) and year (i.e., before and after 2011). We find that more social security contributions lead firms to decrease capital structure, particularly for firms with greater labor intensity and tighter financial constraints as well as those located in areas with greater fiscal pressure. Furthermore, consistent with the financial distress hypothesis, a firm’s operating leverage and profitability volatility increase, and the supply of trade credit decreases. Specifically, we exclude several alternative explanations, including firms’ other motivations and creditors’ strategic behavior. Our findings demonstrate that firms tend to choose conservative financing policies to partially mitigate the likelihood of financial distress caused by increasing social security contributions.

Keywords: Social security contributions; Capital structure adjustment; Financial distress; Difference-in-differences estimation; China

JEL Classification: G32, G34, J32, K31

Suggested Citation

Liu, Guanchun and Liu, Yuanyuan and Zhu, Yueteng, Social Security Contributions and Corporate Financing Decisions: Evidence from China’s Social Insurance Law (June 30, 2019). Available at SSRN: https://ssrn.com/abstract=3564252 or http://dx.doi.org/10.2139/ssrn.3564252

Guanchun Liu (Contact Author)

Shanghai University of Finance and Economics - School of Public Economics & Administration ( email )

Shanghai, 200433
China

Yuanyuan Liu

Fudan University

Beijing West District Baiyun Load 10th
Shanghai, 100045
China

Yueteng Zhu

New York University (NYU), Department of Economics, Students ( email )

New York, NY
United States

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