Tax incentives and firm financing structures: evidence from China's accelerated depreciation policy

This study used China's accelerated depreciation policy (2014-2015) as an exogenous shock to examine the impact of tax incentives on firm financing structures. Based on data from China's A-share listed companies from 2010 to 2017, we estimated a difference-in-differences model and found that the accelerated depreciation policy increased firms' liability-asset ratio. Moreover, this rise was mainly seen in firms' current liability-asset ratio (i.e., short-term leverage), while long-term leverage remained stable, which shortened firms' debt maturity. The mechanism exploration showed that the accelerated depreciation policy stimulated fixed asset investment, and this investment increase was mainly financed by short-term debt, leading to greater maturity mismatch between firm assets and liabilities. Further heterogeneity analysis showed that the observed rise in short-term leverage was more serious among firms that were less likely to be allocated long-term credit from banks, including small-sized firms and those with a low share of tangible assets.