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

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.