A Research On The Impact Of Income Tax Upon Capital Structure Of Chinese Listed Companies

As the old western saying goes, "there are only two things certain in life-death and taxes." With the continuous development of social economy, modern taxing system has become increasingly meticulous and complicated, gradually penetrating into all aspects of the social economy, influencing the interests of both corporations and individuals and finally turn into an unavoidable factor for economy decision making. In June 1958, the famous paper The Cost of Capital, Corporation Finance and the Theory of Investment was published by F.Modigliani and M.H.Miller (i.e. MM) on American Economic Review, symbolizing the introduction of modern capital structure theory. The MM Theorem sets series of assumptions and cannot explain the practical economic phenomena. Therefore many economists, following with the MM research idea, get a great deal of breakthroughs and expansions, making the modern capital structure theory more and more approximate to the real economic conditions. But every economist investigating the corporative capital structure has to take the income tax factors into account. Just as mentioned by Miller, U.S. tax system is deeply and widely influencing lots of companies, but more important influencing the MM related financial decision. For this reason, the tax factor stands head and shoulders above the rest in financial domain.Nevertheless, when the western researchers study on the capital structure and corporative financial structure, the income tax factors they calculate are based on their capital market and taxing system of their own countries. In China, there are a lot of unreasonable phenomena in the capital market taxing system and corporative financial structure. On January 31st,2004, Some Opinions of the State Council on Boosting the Reform and Opening-up and the Stable Development of the Capital Market (commonly known as Nine Articles of the State Council) was promulgated, since then Chinese capital market tax system has being under continual reform and improvement. A new research chance approaches as the new Income Tax Law of People's Republic of China came into effect from January 1st,2008 and remarkably reduced the enterprise income tax. With the rapid development of Chinese capital market, it is essential to start with the comparison of Chinese and western income tax system, analyze the western research accomplishments, and then probe into their applicability in Chinese income tax system. On this basis, research the characteristics of Chinese and American listed companies'capital structure to find the income tax factors contained, finally propose policy suggestions of the companies' capital structure decision making methods based on Chinese income tax system.In this dissertation, based on the theory and science of economics, management, finance, accounting, banking and public finance, concerned with the our country's macro-system, the author give the standard and empirical research on how to use the capital market taxing system to optimize corporative financial structure for listed companies from the microscopic perspective. There are eight chapters in this dissertation.Chapter one describes the topic selection background, research objects, research methods and the organization of this dissertation.In chapter two, firstly review the research on impact on financial structure from income tax both in the eastern and western (mainly China and US) has been made. By analyzing the deficiency and limitation of domestic research papers, the key problems this dissertation targets reveals.Chap 3 begins with the comparison of Chinese and US income tax legal system and the analysis of the feature on financial structure for the two countries' listed companies. Due to the complexity of the two nations' income tax legal systems, only the classification and summary are made according to the goal of this dissertation. From the viewpoint of the affects on the financing company's capital structure, the biggest difference between two countries' income taxing system is the taxing rate form. In US, whether companies or individuals, the progressive tax rate is adopted and at the same time there are variations among the enterprise income tax, individual income tax and capital gains tax. Due to the nonlinear characteristics of progressive rate, the income taxing factors become the inherent variables for companies'decision making. In China, the adoption of proportional tax rate on enterprise income tax, moneyed interest, bonus, dividend and individual income tax make it impossible for both company and individual adjust their effective tax rate by their own decision-making, therefore, the income tax factors are the exogenous variables for Chinese companies' capital structure decisions. In the circumstances, the changes of Chinese income tax system can bring more impact for companies' capital structure.The US enterprise financing prefers the Pecking Order Theory (Myers and Majluf, 1984), i.e. the enterprise financing will follow the order:Internal Financing> Debt Financing> Equity financing. Whereas Chinese enterprise financing order is as following: Equity financing> Debt Financing> Internal Financing. To be specific, in the capital structure of Chinese listed companies, equity financing accounts for the most important portion (that is 44.18%), bank credit (33.27%), internal financing (21.40%) come next, and bond issuance (1.15%) comes finally. The strong preference for equity financing can be easily seen. The reasons for the difference between these two enterprise capital structures are connected to taxing systems in the both countries.Based on the general analysis, Chap 4 mainly analyzes the capital market taxation mechanism functions as following:Income tax→Companies'cash flow and capital cost→Companies' capital structure→Corporative governance structure arrangement→Companies' capital structure adjustment. In this chapter, the author tried to work out the main research clue for the impact of income tax on corporate capital structure, so as to provide the basis for the study of Chapter 5 and Chapter 6.Chapter 5 discusses on the influence upon companies' cash flow and capital cost. The author also notices the latest changes of the income tax law and compares the varieties of the decision making related to the capital structure before and after the amendment of the income tax law. And think further about the influence upon the decision of companies' capital structure from profitability, non-debt tax shields and the effect of corporative governance. At last, an empirical inspection has been conducted on the relevance between enterprise income tax and Chinese listed companies' capital structure. The result shows that there is a significant positive correlation between enterprise income tax rate and asset-liability ratio of listed company.From the perspective of individual income tax, Chapter 6 analyzes the influence upon companies' cash flow and capital cost from moneyed interest, bonus, dividend income tax and capital gains tax on stock transfers. The author also notices the latest changes of the individual income tax law and compares the varieties of the decision making related to the capital structure before and after the amendment of the individual income law. The effects on companies' capital structure governance have been discussed as well. At last, an empirical inspection has been conducted on the relevance between enterprise income tax and Chinese listed companies'capital structure. The result shows that there is a significant positive correlation between the gap between dividend income tax rate and capital gain tax rate and listed company equity financing preference.In the seventh chapter, a general equilibrium model based on suppliers and buyers in security market was founded. From the perspectives of both financing corporation security supply and investor's requirement, the author analyses the impact of corporate income tax, individual income tax and other taxing facts on the corporate decision on capital structure. According to the general equilibrium model, the author figures out that under the Chinese taxing system the financing structure decisions based on the general equilibrium model is equivalent to those based on partial equilibrium model.In chapter eight, the author firstly recapitulates the main research conclusions. Afterwards, binding to the research topic "the impact of income tax on listed companies' capital structure", some policy recommendations to optimize the listed company's financing structure are proposed. To be specific, the ideas for credit optimization are as following, on one side, hardening the bank loaning constraints, enriching the forms of corporate bonds, further improving the credit rating system and enhancing the protection for the creditor benefits. On the other side, measures to decrease the corporate income tax rate while lowering the individual income tax rate for company bond interest can be employed in order to perfecting the internal debt structure. The ideas for equity optimization are as follows, to reduce state-owned shares by stock repurchase and increase the proportion of floating stock, to promote institutional investors and establish diversified structure of property right. On this foundation, following measures can be carried out to realize the structural equilibrium between bond market and stock market:①Set the floor of dividend payout ratio.②Reduce the income taxing rate on individual dividend.③Impose tax on capital gain. Meanwhile proper tax can be levied on the dividend for state shares and company legal shares, which would help to definite the state owned share main body. Finally, the research limitations and following research directions are also discussed in this chapter.The study on the impact of income tax upon companies'capital structure is a research topic of prolific contents. Many domestic scholars have conducted lots of fruitful foundation and exploration in this field. This dissertation benefits a lot from previous research results. However there are some innovative points have been proposed by the author in the course of research in this dissertation.(1)Reviewing the correlation between income tax and companies' capital structure in the capital market environment, the author declared that the impact of taxing on capital market is the representation of taxing macro-control, however,the impact on corporate financial structure is the result of taxing micro-control. The capital market changes, in turn, will present feedbacks to the changes to national taxation policy. Based on these arguments, some advice has been proposed to optimize companies' capital structure from the standpoints of the existing tax system and improving the capital market tax system, including debt optimization and equity optimization.(2)Taking into account for both cash flow and capital cost in analyzing the impact of income tax upon companies' capital structure, built the pie model for income tax consideration, fully analyze the mechanism of income tax effecting on companies' capital structure. That is Income Tax→Effecting on companies' cash flow and capital cost→Effecting on companies'capital structure→Arranging corporative governance→Adjusting companies' capital structure.(3)By introducing the stock transfer capital gains, another form of stock rights income, the Miller Model (Miller, M. H.1977), was extended. In order to investigate the impacts of financing companies'income tax, debtor interest income tax, dividend income tax and capital gain tax upon companies'financial decisions, a decision making model was constructed which takes the above four factors' difference into account.(4)A new General Equilibrium Model in stock market was revised, which considered both nature person and company legal person and broke the imprison of viewing the effect only from the perspective of nature person investors and overlooking the issues of institutional investors tax in the previous research. Meanwhile, based on the Income Tax Law of People's Republic of China (come into effect on January 1st,2008), analyzed the financing company tax benefits by comparing financing from nature persons and company legal persons, demonstrated that the irrelevance between tax and capital structure is not applicable in China.Although certain efforts have been made in studying the relevance between tax and capital structure in this dissertation, there inevitably exist some regretful limitations and deficiency due to the restricted research facilities and capabilities. Here are some examples, the lack of empirical proof temporarily for the transformation of companies'capital structure decision making after the enforcement for new income tax law in 2008; the neglect of the effect of tax adjustment on capital structure; an alternative variable was adopted to inspect the relation between individual income tax and listed companies' capital structure due to the inconvenience to acquire the data of individual income tax.