Deleveraging, Tax and Corporate Policies

46 Pages Posted: 22 Apr 2021

See all articles by Li Huang

Li Huang

City University of Hong Kong (CityU) - Faculty of Business

Oliver Zhen Li

National University of Singapore (NUS)

Hang Liu

Dongbei University of Finance and Economics

Chenkai Ni

Fudan University

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Date Written: April 22, 2021

Abstract

Exploiting a government-initiated deleveraging program, we investigate how marginal corporate tax rate affects corporate policy changes in response to a credit shock. We find that, after the initiation of China’s 2015 deleveraging program, high-tax-rate firms reduce leverage to a less extent compared with low-tax-rate firms. This effect is stronger in non-state-owned firms and firms with less non-debt tax shields. High-tax-rate firms reduce dividend and switch to equity financing to a less extent. Through retaining more debt, high-tax-rate firms cut less investments in fixed assets, R&D and human capital. With this unique deleveraging setting, we reveal important implications of the tax-leverage link for corporate policies.

Keywords: deleveraging, marginal corporate tax rate, capital structure, investment, state ownership

Suggested Citation

Huang, Li and Li, Oliver Zhen and Liu, Hang and Ni, Chenkai, Deleveraging, Tax and Corporate Policies (April 22, 2021). Available at SSRN: https://ssrn.com/abstract=3831732 or http://dx.doi.org/10.2139/ssrn.3831732

Li Huang

City University of Hong Kong (CityU) - Faculty of Business ( email )

Tat Chee Avenue, Kowloon, Hong Kong SAR
Kowloon
Hong Kong

Oliver Zhen Li

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

Hang Liu

Dongbei University of Finance and Economics ( email )

Dalian, 116025
China

Chenkai Ni (Contact Author)

Fudan University ( email )

Guoshun Road 670
Yangpu
Shanghai, Shanghai 200433
China

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