Corporate tax, capital structure, and the accessibility of bank loans: Evidence from China

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5 34 L. Wu, H. Yue / Journal of Banking & Finance 33 (2009) that all firms behave in a way that maximizes profits. We believe that this is a reasonable assumption, because our sample firms are listed on the stock market and are subject to the supervision of the market. Although a state shareholder may have objectives other than profit, shareholders such as corporations, financial institutions, and individual investors impose pressure on listed firms to be profit-oriented. Also, firms are subject to extensive disclosure requirements and to the control and monitoring of corporate governance mechanisms (such as boards of directors, independent directors, outside audits, etc.). Therefore, it is reasonable to assume that all firms behave in a way that maximizes shareholder wealth. However, we do note that if those firms that are more connected to the government do not behave in a way that maximizes shareholder wealth, then it will bias against to find the results that these firms increase more leverage. 4. Empirical results 4.1. Descriptive statistics Table 1 reports the means, medians, and standard deviations for our main variables. We have 372 and 418 firms in 1999 and 2000, respectively, and 464 firms from 2001 to The change of leverage is, on average, positive, with Table 1 Descriptive statistics Year Obs DLEV GROWTH AROA LEV0 SIZE DDEP Panel A: Mean Total Panel B: Median Total Panel C: Standard deviation Total DLEV is the change of leverage, defined as leverage (t) leverage (t 1), where leverage is total liabilities divided by the book value of total assets. GROWTH is the growth of assets, defined as total assets (t) /total assets (t 1) 1. AROA is the average of return on assets (before tax) in year t and t 1. LEV0 is the leverage of year t 1. SIZE is the natural logarithm of total assets. DDEP is the change of depreciation from year t 1tot, divided by total assets. All variables except for SIZE are presented as percentages. a mean of 1.39% and a median of 0.99%, which indicates that the leverage increased for all firms during the sample period. The increase of leverage is also confirmed by LEV0, which is the leverage at year t 1. LEV0 increased from a mean of 42.55% (median 42.41%) in 1999 to 47.28% (median 47.68%) in The growth of assets is, on average, 14.42% (median 8.42%), which is higher than the return of assets, 3.66% (median 4.4%). This suggests that the expansion of assets also relies on external financing. We use the percentage of non-tradable shares at the end of The mean (median) is 58.32% (60.00%), indicating that most of the shares in typical listed firms cannot be traded on the market Testing Hypothesis 1 Table 2 presents the changes of leverage conditional on whether the firms received LGTR in We divide our entire sample into two groups, according to whether the firms received LGTR. In 2001, 192 firms received LGTR and 272 firms did not. We then compare the means and medians of leverage changes between these two groups in the years from 2001 to In 2001, the change of leverage is, on average, 3.06% (median 2.36%) for LGTR firms, whereas for non-lgtr firms it is, on average, 1.12% (median 1.26%). The t-test and Wilcoxon test indicate that the differences of mean and median leverage changes are significant at less than 5% and 10% level, respectively. In 2002, the changes of leverage between the two groups are indistinguishable. In 2003, the leverage change of LGTR firms is, on average, 2.96% (median 1.13%), which is again significantly higher than that of non-lgtr firms (mean 0.5%, median 0.72%). The variable of cumulative leverage changes indicates that the LGTR firms increased leverage by an average of 7.52% (6.27% median) from 2001 to 2003, significantly higher than the non-lgtr firms, which increased by an average of 2.94% (2.64% median). We also examine the changes of leverage in 1999 and 2000 as control periods. Because the termination of LGTR was announced near the end of 2000, and was effective from the beginning of 2002, the leverage changes between the LGTR and non-lgtr groups in 1999 and 2000 should be indistinguishable. This is actually what we find from the data. In Table 3, we use regressions to control other variables that could possibly affect the firms leverage decisions. The dependent variable is change of leverage (DLEV). The independent variables include LGTR, growth (GROWTH), performance (AROA), previous leverage (LEV0), firm size (SIZE), and change of non-debt tax shield (DDEP). For control variables, the coefficients for GROWTH, AROA, and LEV0 are significant in every year from 1999 to GROWTH is positively related to 13 We only have information for non-tradable shares in However, the percentage of non-tradable shares would not change much, because those shares could not be traded on the market.

7 36 L. Wu, H. Yue / Journal of Banking & Finance 33 (2009) Table 3 Regressions of change of leverage (DLEV) on LGTR and other control variables Year Intercept LGTR GROWTH AROA LEV0 SIZE DDEP Obs Adj-R 2 Panel A: Testing period 2001 Coeff T-stat ( 0.12) (1.66)* (5.94) ** ( 4.63) ** ( 5.39) ** (0.77) (1.82) * 2002 Coeff T-stat ( 2.32) ** (1.10) (9.85) ** ( 6.40) ** ( 6.78) ** (3.00) ** (0.42) 2003 Coeff T-stat ( 0.21) (1.84)* (12.26) ** ( 11.99) ** ( 6.50) ** (1.00) ( 2.79) ** Cumulative Coeff T-stat ( 1.10) (3.03)** (11.22) ** ( 12.92) ** ( 11.63) ** (2.59) ** ( 1.16) Panel B: Control period 1999 Coeff T-stat ( 2.01) ** (0.24) (7.15) ** ( 8.29) ** ( 5.61) ** (2.83) ** (0.34) 2000 Coeff T-stat ( 0.33) ( 0.49) (5.90) ** ( 7.06) ** ( 8.48) ** (1.51) (7.27) ** The dependent variable is DLEV, defined as leverage (t) leverage (t 1), where leverage is total liabilities divided by the book value of total assets. LGTR is a dummy variable, which equals 1 if the firm received LGTR in 2001, and 0 otherwise. GROWTH is the growth of assets, defined as total assets (t) /total assets (t 1) 1. AROA is the average of return on assets (before tax) in year t and t 1. LEV0 is the leverage of year t 1. SIZE is the natural logarithm of total assets. DDEP is the change of depreciation from year t 1tot, divided by total assets. For variables in the cumulative regression, t is replaced with 2003, and t 1 is replaced with T-statistics are in parentheses. ** and * represents significance at the 5% and 10% level, respectively. Table 4 Change of leverage conditional on LGTR and the accessibility of bank loans Year Group Obs Mean Median t-test Wilcoxon test Panel A: Testing period 2001 N-LGTR LGTR-LA LGTR-HA ** N-LGTR LGTR-LA LGTR-HA N-LGTR LGTR-LA LGTR-HA ** 4.47 ** Cumulative N-LGTR LGTR-LA LGTR-HA ** 4.44 ** Panel B: Control period 1999 N-LGTR LGTR-LA LGTR-HA N-LGTR LGTR-LA LGTR-HA The change of leverage in each year (DLEV) is defined as leverage (t) leverage (t 1), where leverage is total liabilities divided by book value of total assets. The cumulative change of leverage during 2001 to 2003 (DLEV) is defined as leverage (2003) leverage (2000). DLEV is presented in percentage. The sample is divided into three groups. The base group is N-LGTR, which includes firms that did not receive LGTR in LGTR-LA group includes firms that received LGTR in 2001 and have a low level of access to bank loans. LGTR-HA group includes firms that received LGTR in 2001 and have a high level of access to bank loans. The table presents mean and median of leverage change for each group. We use T-test (Wilcoxon score test) to test whether the mean (median) of DLEV in LGTR-LA (LGTR-HA) group is significantly different with that of the base group (N-LGTR). ** and * represents significance at the 5% and 10% level, respectively. (LGTR-LA) have larger leverage changes than those in Group 1 in 2001, 2002, and in the three-year cumulative, but all of the differences are insignificant. We also examine the changes of leverage in the three groups within the control periods of 1999 and The differences between Group 2 (LGTR-LA) or Group 3 (LGTR-HA) and the benchmark Group 1 (N-LGTR) are never significant. The results in Table 4 indicate that the firms that have both the incentive and a high ability to increase leverage (Group 3) significantly increased their leverage, whereas firms that have the incentive but a low ability to increase leverage (Group 2) did not significantly

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