Research On The Enterprise Income Tax On Capital Structure

The theoretical research on capital structure decision-making originates from the classic papers of Modigliani and Miller, namely MM Theory. The MM Theory, however, cannot explain the real economic phenomena as it is based on a set of assumptions. Subsequently, many economists in this area, following the route of MM Theory, have further developed the modern capital structure theory. They relaxed the strict assumptions to comply with the real economic conditions. Taking this opportunity, many Western scholars studied the tax effects on capital structure more deeply and have achieved fruitful results. Compared with the West, research on tax effects on capital structure is less and not deep enough in China. With the development of society and economy, the corporate income tax has become an important factor on decision-making. Therefore, it is of great importance to study the capital structure under the tax background in China.This paper theoretically discusses the mechanism through which related factors work on the capital structure, compares the old and the new tax law, and analyses micro-economically the effect of income tax reform on capital structure. Subsequently, it does empirical analysis to validate the relationship between tax and capital structure. Finally, the paper reaches conclusions and puts forward some suggestions.The conclusions drawn from the paper are as follows:Corporate income tax has a significant impact on the capital structure of the listed companies. Corporations with high tax rate prefer more liabilities. Whether the real tax rate or the marginal tax rate is set to be the explanatory variables, tax has no significant impact on the asset-liability ratio of non-listed companies. There is a positive correlation between capital structure and profitability. Meanwhile, there is a negative correlation between non-debt tax shield and capital structure of listed companies while positively correlated to that of non-listed companies. Based on the result from the empirical analysis, the preferential tax policy has significant impact on asset-liability ratio, i.e. companies favored by preferential policy have lower asset-liability ratio.At the end of the paper, it puts forward suggestions based on the research result. Firstly, preferential policies for listed companies should be further standardized. The qualification should be strictly checked on under the framework of the new tax law so that illegal enjoyment of preferential policies can largely be forbidden; secondly, diversification of mode of financing and optimization of capital structure for non-listed companies can be achieved through progressive establishment of a regional equity trading market; moreover, reasonable selection of sources of debt financing is suggested to avoid triggering a restrictive clause of tax; finally, changes in macro-economic conditions should be closely watched to avoid blind expansions of the scale of debt financing.The innovation of this paper includes: Firstly, the early literature only makes researches on the influence of corporate income tax on listed companies. Since listed companies are generally large-scale enterprises, the research cannot cover enterprises of all sizes. The shortcomings of making large-scale enterprises as representatives of all enterprises are obvious. In addition, scholars in China mainly use WIND data analysis and no validation based on tax return data has been done. This paper, instead, brings in the empirical research on non-listed companies and use tax return data to enhance the accuracy of the model, so that the conclusions drawn from it are more reliable. Secondly, the supporting polices of the new tax law has been put in effect and further refined. It has covered all aspects of corporate income tax until the end of2012. Thus, the conclusions can be more stable. Thirdly, the empirical analysis of this paper uses Shanghai and Shenzhen A share data from2004to2011, and compared the results from before and after the tax system reform, so that the changes of each variables in the degree of influence on capital structure can been clearly observed.