Investment incentives and leverage: Evidence from China’s accelerated depreciation policy

Abstract

Using a difference‐in‐differences (DID) approach, this paper evaluates the effects of China's accelerated depreciation policy on corporate leverage. We find that the policy significantly increases corporate total leverage, which is mainly driven by the increase in long‐term leverage. Moreover, raising investment in fixed assets serves as the primary mediating channel through which the policy affects long‐term leverage and thus, total leverage. Finally, the positive effects of the policy on leverage are primarily significant in firms that are not close to tax exhaustion, and firms that invest in long‐lived assets.

Tax Incentives and Maturity Mismatch between Investment and Financing: Evidence from China

“…Accelerated depreciation is an important part of the COVID-19 response around the world. However, the abuse of tax incentives may lead to a spike in corporate leverage and even trigger systemic financial risks (Zhao and Fang, 2022b). In addition to the danger of high leverage, the risk of maturity mismatch between financing and investment also cannot be ignored (Bai, 2022).…”

“…Previous studies have rigorously evaluated the investment eff ect of ADP and found that ADP has indeed had positive impacts on business investment (Zwick and Mahon, 2017;Ohrn, 2019;Fan and Liu, 2020). Corporate internal funds are not likely to cover the capital required for these investments, so firms need external fi nancing (Zhao and Fang, 2022b). Further, combined with other determinants of corporate debt maturity structure, fi rms determine their optimal fi nancing maturity structure and then apply for loans from banks.…”

“…First, it contributes to ongoing research on the impact of ADP on corporate behavior by estimating the policy eff ects of ADP on the maturity mismatch between investment and financing. The available literature mainly focuses on the effects of ADP on business investment (Zwick and Mahon, 2017;Ohrn, 2019;Fan and Liu, 2020;Cui et al, 2022), labor market outcomes (Zhao and Fang, 2022a), and corporate leverage (Zhao and Fang, 2022b), and the maturity mismatch effect of ADP has not been rigorously evaluated. This paper was intended to fi ll this void by carefully exploring whether and how ADP aff ected corporate maturity mismatch.…”