Study On How Debt Tax Shield Affect On Company Financing

The interest of debt financing can be deducted from the taxable income before taxing and taking the tax-deducted advantage ,is called the tax shield.MM(1963)considered that, to take full advantage of the tax shield, the optimal capital structure of maximizing firm value is 100% in debt in the model of Capital structure when being introduced the firm tax. After that, the Trade-off theory and the Agency theory all discussed how to make choices between debt and equity by using the tax shield. This paper will discuss how the tax shield acts on the financing behavior based on the sample of listed private enterprise. We find that the tax shield affects positively on debt financing behavior, and the non-debt tax shield, including depreciation and investment credit, has an opposite affection on it. The non-debt tax shield has an substitution effect on debt tax shield , though it's quite limited.The foreign-funded and domestic enterprise had realized unification in tax after tax reform in 2008. The new tax law set 25% (33% before)as statutory tax rate , meanwhile it required that some companies implementing 15% preferential rate gradually increased to 25% statutory tax rate in transition period of 5 years. Therefore some companies'active tax rate rised while some descended. This paper studied how the rate changes acted on the company financing behavior. We find that tax rate-rised companies have increase debt, and tax rate-descended companies have not decreased debt may due to improvement of financing situation or their relying on debt ,but the affect of tax shield on debt becomes weak.Considering the special internal manage structure, we introduce the concentration of equity, diming the first ownership as the independent variable , and explore how the concentration of equity effects company financing behavior through the tax shield. We find that if the first ownership controls the company , he doesn't show any attention to the tax shield, and if the first ownership controls the company with others , he will show a strong preference to the tax shield.