Corporate tax aggressiveness and capital structure decisions: Evidence from China

We propose a theoretical model based on the trade-off theory to illustrate how corporate tax aggressiveness affects corporate debt utilization. Empirical evidence robustly supports the prediction that corporate tax aggressiveness can lead to reduced corporate debt utilization and this association is subject to firm's size and profitability such that large firm exhibits more sensitive substitution effects and extremely profitable firms exhibits complementary effects rather than substitution effects. Finally, by focusing on Chinese firms, where controlling government ownership is more prevalent and persistent, we find that government ownership helps strengthen the association between corporate tax aggressiveness and corporate debt utilization.