Social insurance law and corporate financing decisions in China

Guanchun Liu, Yuanyuan Liu, Chengsi Zhang and Yueteng Zhu

Journal of Economic Behavior & Organization, 2021, vol. 190, issue C, 816-837

Abstract: This study investigates whether and how 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-dimensional variations: initial social security contribution rates across firms (i.e., high vs. low) and year (i.e., before and after 2011). We find that more social security contributions cause firms to issue less debt in their capital structure, particularly firms with more severe labor market frictions, greater labor intensity, unhealthier financial status, tighter financial constraints, and those located in low-income areas with less developed financial systems and greater fiscal pressure. Mechanism tests show that firms’ operating leverage, bank credit default risk, and profitability volatility increase, while the supply of trade credit decreases, which is consistent with the financial distress hypothesis. The findings suggest that firms tend to choose conservative financing policies to mitigate the likelihood of financial distress caused by increasing social security contributions.

Keywords: Social insurance law; Capital structure; Financial distress; China (search for similar items in EconPapers)
JEL-codes: G32 G34 J32 K31 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:190:y:2021:i:c:p:816-837

DOI: 10.1016/j.jebo.2021.08.019

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