Abstract
This paper uses a random-effects model and takes 224 listed companies in China from 2002 to 2017 as a sample to empirically study the relationship between the corporate income tax shield effect and corporate capital structure in China. It is found that the debt tax shield and corporate capital structure are significantly positive. Relatedly, the non-debt tax shield is significantly negatively related to the corporate capital structure. At the same time, the impact of debt tax shields and non-debt tax shields on corporate capital structure varies from industry to industry.
Highlights
The tax shield effect refers to tools or methods that can reduce the effect of corporate tax burden, including debt tax shields and non-debt tax shields
Based on the previous theoretical analysis, in order to verify the relationship between the tax shield effect and the capital structure, the following hypotheses to be tested are proposed: 1) Hypothesis 1: There is a positive correlation between the corporate capital structure and the debt tax shield effect
After performing a descriptive statistical analysis of the relevant variables under the full sample, it can be seen from Table 2: In the sample data, the average value of the DAR is 47%, and the gap between the maximum and minimum values is large; the average value of ETR is 22%, which is lower than the statutory tax rate of 25%, indicating that the interest deduction of borrowing costs has a debt tax shield effect
Summary
The tax shield effect refers to tools or methods that can reduce the effect of corporate tax burden, including debt tax shields and non-debt tax shields. The tax shield effect brought by relevant regulations in China’s corporate income tax for enterprises includes the debt tax shield effect and the non-debt. The debt tax shield effect refers to the tax saving effect brought by the pre-tax deduction of corporate debt interest expenses. The higher the corporate income tax rate, the greater the tax saving effect brought by the pre-tax deduction. The non-debt tax shield effect refers to the tax-saving effect of expenses other than debt interest, such as investment credits, depreciation of fixed assets, amortization of intangible assets, R&D investment, etc. The tax burden and rate in this article are limited to the category of corporate income tax. It puts forward policy suggestions to improve China’s tax system and guide listed companies to form a desirable capital structure
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