Deleveraging policy, leverage management, and firms’ aggressive tax planning

Abstract

ABSTRACT Using data on non-financial firms listed on China’s A-share market from 2011 to 2018, we study how the effect of the China’s deleveraging policies on firms’ tax planning changes with their engagement in leverage management. We find that the effect of the policies on tax planning of over-indebted firms is more negative when they engage in more leverage management. These results are stronger when (1) tax enforcement is less strict; (2) firms are more financially constrained; and (3) firms are non-state-owned enterprises (non-SOEs). These findings increase our understanding of the economic consequences of deleveraging policies and leverage management. They also contribute to the literature on capital structure and corporate tax planning.