Taxation and debt maturity: Empirical evidence from a quasi-experiment in China

Abstract

We take advantage of China's new Corporate Income Tax Law and use a difference-in-differences approach to determine whether foreign investment enterprises (FIEs) responded to the law by shortening debt maturity. Employing the Chinese Industrial Enterprises Database from 2007 to 2008 to implement the analysis, we find that FIEs have responded to the law by shortening debt maturity; the treatment effect is more negative for Hong Kong-Macau-Taiwan (HMT) investment enterprises than for other FIEs; and the treatment effect by restricting the control group to Private-Owned Enterprises (POEs) is more negative than that by restricting the control group to State-Owned Enterprises (SOEs). All three findings are consistent with the tax-based theories of debt maturity, and hence we conclude that taxation plays an important role in the choice of debt maturity. We argue that our conclusion is not China-specific, but a general lesson for modern finance theory and is portable to developed countries.