VAT rate cut and enterprise deleveraging: Evidence from China

• Published in: Economic analysis and policy 2023-06, Vol.78, p.1254-1266
• Main Authors: Liu, Yongjiu, Liu, Junyan, Dong, Peiling
• Format: Article
• Language: English
• Subjects: Capital structure; Deleveraging; DID model; Value-added tax; VAT rate cut or reduction
• ISSN: 0313-5926
• DOI: 10.1016/j.eap.2023.05.014

‘Deleveraging’ is an important objective of China’s economic macro-control. Tax cuts are an important measure to promote enterprises’ deleveraging and reduce operating costs and financial risks. This study employs the 2018 value-added tax (VAT) rate reduction by the Chinese government in a quasi-natural experiment with financial data from listed companies from 2016 to 2019 as research samples, applying the difference-in-differences (DID) model to analyse the policy’s deleveraging effect. The results show that the VAT rate reduction significantly reduced the leverage and current debt ratios of enterprises in the treatment group but had no significant effect on long-term debt ratio. Further investigation shows that the VAT rate reduction’s deleveraging effect was more significant for state-owned, highly leveraged companies, small and medium-sized enterprises and companies in eastern China. In western China, the total leverage ratio of enterprises experienced no significant change, current debt ratio increased, long-term debt ratio decreased and financial risks and financing constraints further intensified. This study’s conclusions have significance as a reference for China and other developing countries to improve tax reduction policies, stimulate enterprise vitality, reduce enterprise financial risks and effectively navigate the economic recession.