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The effect of value-added tax on leverage: Evidence from China’s value-added tax reform

Jingxian Zou, Guangjun Shen and Yaxian Gong

China Economic Review, 2019, vol. 54, issue C, 135-146

Abstract: In this paper, we use China’s value-added tax (VAT) reform in 2007, which was aimed to encourage fixed investment purchasing, as a natural experiment to explore the effect on firm financial leverage. Results show an expansion in firm balance sheet after the reform, manifested by greater liabilities (long-term, short-term and total liability) and asset. Moreover, in terms of the ratio to asset, it’s found that long-term liability rose while the short-term liability dropped, and as a net effect, the total asset-liability ratio declined as the latter effect dominated. To theoretically explain the observed patterns, three mechanisms are highlighted, “income effect”, “maturity-match effect” and “market disciplining effect”, where income effect corresponds to a proportional expansion of balance sheet while the latter two effects alter the composition of firm leverage.

Keywords: Value-added tax reform; Debt maturity; Capital structure; M-M theory (search for similar items in EconPapers)
Date: 2019
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