Xiaoye Jin2021

International Review of Economics and Finance 75 (2021) 94–111
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International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref
Corporate tax aggressiveness and capital structure decisions:

Evidence from China
Xiaoye Jin
International School of Law and Finance, East China University of Political Science and Law, China
A R T I C L E I N F O A B S T R A C T
JEL classification: We propose a theoretical model based on the trade-off theory to illustrate how corporate tax
G32 aggressiveness affects corporate debt utilization. Empirical evidence robustly supports the pre-
K34 diction that corporate tax aggressiveness can lead to reduced corporate debt utilization and this
Keywords: association is subject to firm’s size and profitability such that large firm exhibits more sensitive
Tax aggressiveness substitution effects and extremely profitable firms exhibits complementary effects rather than
Leverage
substitution effects. Finally, by focusing on Chinese firms, where controlling government owner-
Capital structure
ship is more prevalent and persistent, we find that government ownership helps strengthen the
China
association between corporate tax aggressiveness and corporate debt utilization.
1. Introduction
The literature has developed a number of insights for why tax should matter for corporate capital structure and attributes the
negative relationship between tax aggressiveness and leverage to the non-debt tax shield and debt substitution effect (see DeAngelo &
Masulis, 1980; Graham & Tucker, 2006; Lim, 2011; Richardson et al., 2014). However, there are still questions surrounding this
proposition. Specifically, we are still unsure about whether the substitution effect varies for a continuum of tax avoidance activities,
from benign accelerated depreciation to very aggressive shelters. Moreover, more research is required to ascertain whether different
degrees of firms’ profitability may result in different magnitudes of substitution effect or even reverse the substitution effect. In a
broader setting, it is not clear from the current literature whether or not the substitution effect observed in the U.S. firms can be extended
to Chinese firms., where government ownership is more prevalent and persistent.
Motivated by this gap in the literature, we first propose a simple theoretical model based on the trade-off theory to illustrate how
corporate tax aggressiveness affects capital structure decisions and then empirically test the model’s major predictions. Based on the
framework of the trade-off theory, we assume that a firm chooses a combination of tax planning and capital structure to maximize its
after-tax cash flow. Firstly, our theoretical model predicts that corporate debt utilization is inversely associated with corporate tax
aggressiveness for a large cohort of firms. Secondly, our theoretical model predicts that the inverse association between corporate tax
aggressiveness and corporate debt utilization is subject to firm’s profitability such that for extremely profitable firms the model holds
that corporate tax aggressiveness and corporate debt utilization may be complements rather than substitutes. Finally, our theoretical
model predicts that the inverse association between corporate tax aggressiveness and corporate debt utilization is more pronounced for
E-mail address: xiaoye.jin.1@ecupl.edu.cn.
https://doi.org/10.1016/j.iref.2021.04.008
Received 25 March 2018; Received in revised form 18 September 2020; Accepted 6 April 2021
Available online 13 April 2021
1059-0560/© 2021 Elsevier Inc. All rights reserved.
X. Jin International Review of Economics and Finance 75 (2021) 94–111
government-controlled corporations than privately-controlled corporations.1

More specifically, using 1217 firms listed on the Chinese (Shanghai and Shenzhen) A-share stock market over the 2007–2016
period,2 we test whether various measures of corporate leverage are related to four different measures of tax aggressiveness: tax shelter
prediction score, book-tax difference, current effective tax rate and effective tax rate.3 Consistent with our predictions, empirical results
show that for most firms corporate tax leverage is inversely related to corporate aggressiveness even if controlling for factors that
reliably determine corporate debt use and when using industry-adjusted leverage ratios. In order to address the endogeneity issue, we
apply a fixed-firm, fixed-year model and confirm that the inverse relation between corporate tax aggressiveness and corporate leverage
is also evidenced on a within-firm basis. This finding suggests that a firm’s leverage is sensitive to its tax aggressiveness over time. Our
robustness analysis suggests that the relation between corporate tax aggressiveness and corporate leverage is attenuated during the
financial crisis of 2007–2008 and is more pronounced for large firms.4 The size effect is likely due to the expertise possessed by large
firms to implement the substitution strategy and elaborately designed company structure to support such strategy. We also find that the
inverse relation between corporate tax aggressiveness and corporate leverage is subject to a firm’s profitability and for extremely
profitable firms the relation between corporate tax aggressiveness and corporate leverage could be complementary. Finally, we find that
the inverse relation between corporate tax aggressiveness and corporate leverage is more pronounced for government-controlled
corporations than privately-controlled corporations.5
Our study offers several contributions to the literature on corporate tax aggressiveness and capital structure decisions. First, by
proposing a continuous trade-off model incorporating tax planning, it provides a theoretical basis to demonstrate how the presence of
corporate tax aggressiveness affects capital structure decisions, adding new insight into the trade-off model. As researchers continue to
explore the impact of corporate tax system on firms’ capital structure decisions, we do so by focusing on whether corporate tax
aggressiveness can help explain cross-sectional variations in capital structure. We then theoretically demonstrate that the traditional
interest tax shield may be a weaker determinant of debt utilization than previously thought and empirically confirm that corporate tax
aggressiveness can lead to lower corporate leverage. We thus provide a potential solution to the under-leverage puzzle. Second, despite
the widespread interest in how the presence of corporate tax aggressiveness affects capital structure decisions, most studies on the
subject were conducted in countries with developed capital markets. Our study thus provides additional insights by conducting tests in
Chinese market, which is the largest emerging market with less regulation. Moreover, as government ownership is more prevalent and
persistent in Chinese market, we can further investigate the impact of controlling government ownership on the substitution effect
between corporate tax aggressiveness and corporate debt utilization. Specifically, our findings suggest that controlling government
ownership help strengthened the substitution effect between corporate tax aggressiveness and corporate debt utilization in Chinese
firms. Finally, our most important contribution is that we extend the results of Graham and Tucker (2006) and Lin et al. (2014) to a much
larger and wider universe of firms and provide solid evidence that the capital structure as well as the tax shield theories developed from
a Western economic perspective can be applied to present-day China. Furthermore, the unique feature of concentrated government
ownership in Chinese market provides a new direction to test the inverse relation between corporate tax aggressiveness and corporate
debt utilization.
The rest of the paper is structured as follows. Section 2 briefly reviews related literature. In Section 3, we develop a simple theoretical
model and then propose some testable hypotheses. Section 4 describes the data, sample selection and the empirical model. Section 5
reports estimation results and robustness checks. Section 6 concludes the paper.
2. Literature review
Recent empirical work has confirmed a statistical association between tax and capital structure decisions of firms (Desai et al., 2004;
Faccio & Xu, 2015; Graham, 1996, 2003; Lin et al., 2014). Graham (2008) provides comprehensive surveys of the empirical evidence on
tax and capital structure decisions. More recent studies, however, are more successful in identifying the tax effects. Using a unique
sample of 44 tax shelter cases to investigate whether participating in a shelter is related to corporate debt policy, Graham and Tucker
(2006) find that tax shelters appear to substitute for corporate debt utilization. Barclay et al. (2013) find that leverage ratios of taxable
real estate firms are higher than their nontaxable counterparts. Faccio and Xu (2015) find that corporate leverage increases on average
by 0.41% when the corporate income tax rate increases by 1%. By proposing a tradeoff model of capital structure that allows leverage to
be a function of a firm’s choice of tax aggressiveness, Lin et al. (2014) find tax-aggressive firms use less debt than their tax-passive
counterparts. Using variation in state-level corporate income tax rates in the United States, Heider and Ljungqvist (2015) find that
1
Our first two predictions are consistent with Lin’s et al. (2014) predictions, but we derive them from a more rigorous way. Please see Section 3 for
detailed explanation.
2
The sample period is dictated by the availability of deferred tax data. On January 30, 2007, the China Securities Regulatory Commission (CSRC)
issued a new standard for information disclosure. This new standard makes it available to obtain deferred tax data.
3
Due to data availability, other measures usually used to proxy for tax aggressiveness, for example tax reserves and cash effective tax rates, are not
adopted in our analysis. We expand these measures in Section 4.
4
The use of financial crisis of 2007–2008 represents a natural experiment of Chen’s (2010) dynamic capital structure model and not only enriches
the tax benefits to a broader continuum but also rigorously supports our main hypothesis of substitution effect between corporate tax aggressiveness
and corporate debt utilization.
5
This finding not only contradicts Tse and Rodgers’ (2011) conclusion that no evidence is found to indicate that corporate tax shields can explain
the long-term borrowing behavior of Chinese listed firms but also produces solid evidence that controlling government ownership has previously
unobserved influence on the relation between corporate tax aggressiveness and corporate debt utilization.
95
one percentage point increase in the state-level corporate income tax rate is associated with 0.38 percentage point increase in corporate
leverage. Using confidential company-level tax returns for a large sample of UK firms, Devereux et al. (2018) find a positive and
substantial long-run tax effect on leverage. Overall, successfully identifying the tax effects on capital structure decisions does not help
solve the under-leverage puzzle, a phenomenon first noted by Miller (1977) and Graham (2000) wherein profitable firms appear to be
paying too much in taxes due to their underutilization of debt in light of the expected bankruptcy and agency costs. However, the
findings of Graham and Tucker (2006) and Lin et al. (2014) suggest that lower leverage than predicted by trade-off models observed by
previous researchers is due to the incompleteness of tax data. Once those off-balance sheet debt substitutes, i.e. tax shelters, are
accommodated, firms may not be under-leveraged.6
From papers such as abovementioned, these are certainly important topics of research. The challenge in the area is that there are no
universally accepted definitions of tax avoidance, or tax aggressiveness. Following Hanlon and Heitzman (2010), tax avoidance can be
broadly defined as the reduction of explicit tax and then be treated as a continuum of tax planning strategies where something like
municipal bond investments are at one end and terms such as “aggressiveness” and “sheltering” would be closer to the other end of the
continuum.7 In terms of the definition of tax aggressiveness, Slemrod (2004) defines it as aggressive tax reporting encompassing a wide
range of transactions whose primary intent is to lower the tax liability without involving a real response by the firm and is a subset of tax
avoidance activities more generally.
The literature also varies widely in terms of how to measure tax avoidance. Some studies measure tax avoidance using effective tax
rate (ETR) (for example, Lin et al., 2014). These are computed by dividing some estimate of tax liability by a measure of before-tax
profits or cash flow. This category includes ETR, Current ETR, Cash ETR, Long-run cash ETR and ETR Differential.8 Another type of
measure is book-tax differences and its variations. A potential source of differences between accounting earnings and taxable income is
“aggressive” reporting for book or tax purposes. Therefore, it seems intuitive that book-tax differences could provide information about
tax avoidance behavior. For example, Wilson’s (2009) findings suggest that book-tax differences does capture some element of tax
avoidance as firms accused of engaging in tax shelters have larger book-tax differences than those non-accused firms. Building on the
original book-tax differences, Desai and Dharmapala (2006, 2009) propose a measure of abnormal book-tax differences by regressing
total book-tax differences on total accruals and use the regression residual to proxy for the construct of tax avoidance. Wilson (2009) also
computes a measure of tax shelter prediction score by calculating on a set of variables predicted to be associated with tax sheltering and
finds that large tax shelter prediction scores are typical among firms that exhibit greater tax avoidance behavior. The evidence from
these studies suggests that tax shelter prediction score captures some elements of tax avoidance. Moreover, Frank et al. (2009) estimate
the discretionary portion (DTAX) of their PERMDIFF measure (PERMDIFF is essentially the difference between the effective and stat-
utory tax rates multiplied by pre-tax accounting income).9 Finally, when estimating these measures, most are obtained from financial
statement data rather than tax returns. This may be explained by the fact that tax returns are not publicly available and access is granted
to only a few. In fact, only a few studies have used actual tax return data and aggregated tax returns over companies rather than
company-level tax returns are more often used due to confidentiality restrictions (see Devereux et al., 2018; Gordon & Lee, 2001).
Particularly, as tax return data is private, research conducted using tax return data is thus not replicable.
3. A theoretical model of capital structure with tax planning
In this section, we propose a simple theoretical model to illustrate how corporate tax aggressiveness affects capital structure de-
cisions. By simultaneously choosing its tax plan and capital structure, a firm aims to maximize its expected after-tax cash flow to its stock
and debt holder, V.
The firm’s forecasted cash flow before interest and tax for the period, M, equals all inflows including ordinary and extra-ordinary
gains, cash flow from investments, capital gains, etc., less all outflows including ordinary and extra-ordinary operating expenses,
capital losses, etc. An important standard assumption is that cash flow, M, is not affected by capital structure decisions and constant for
any given total amount of assets.10
Because interest expenses are tax deductible, firms lever up with debt to exploit the tax shield.11 Debt is modeled as a consol bond, that
is, a perpetuity with constant coupon rate r. This is a standard assumption in the literature (see, e.g., Leland, 1994; Duffie & Lando, 2001),
6
It should be noted that Graham and Tucker’s (2006) sample of actual tax shelters is unique, small and out-of-date and thus make their inferences
about the relation between tax shelters and corporate leverage tentative. In comparison, Lin et al. (2014) use a large and recent sample consisting of
1500 publicly listed firms in the U.S. market and adopt various measures to proxy for tax aggressiveness, and thus make their findings more reliable.
Nevertheless, both papers provide solid evidence to support the argument that corporate tax aggressiveness plays an important role in capital
structure decisions and may help explain or alleviate the under-leverage puzzle.
7
This definition conceptually follows that in Dyreng et al. (2008) and reflects all transactions that have any effect on the firm’s explicit tax liability.
Tax aggressiveness also refers to the most extreme subset of tax avoidance activities that are pushing the envelope of tax law (Hanlon & Heitzman,
2010).
8
Hanlon and Heitzman (2010) provide an excellent summary for detailed explanation for these measures.
9
Although tax reserves have been adopted by many papers to proxy for tax aggressiveness, for example Lisowsky et al. (2013) and Lin et al. (2014),
it is not applicable to Chinese firms as there is no such data in China. Therefore, we did not discuss it here.
10
It should be noted that corporate tax aggressiveness does not change M; it only changes the amount of taxes paid to the taxing authority on M or,
equivalently, the expected effective tax rate.
11
Levering up with debt means corporate debt utilization adjustment as well as leverage adjustment, then changes the amount of equity needed to
finance the firm’s total assets, thus leaving total asset size intact. We also assume that there are no signalling effects from a debt-for-equity swap.
96
which helps maintain a time-homogeneous setting. We assume that debt is issued and callable at par and there are no transaction costs
associated with debt issuance and retirement, as well as the retirement of equity.12 Let τ denote the corporate tax rate and the annual tax
benefit of interest deductions is the product of τ and the amount of interest, rD, where D is the amount of debt. As the amount of debt
increases, so does the non-interest costs: the debt-induced agency cost (see Myers, 1977) and the potential for financial distress. We
introduce the parameter α to reflect the debt-induced agency cost via the term ½αM where 0 α 1, i.e. the reduction in cash flow
before interest and tax.13 To reflect the potential for financial distress, we introduce the parameter υ representing the cost of capital for the
firm.
Another type of tax deductible is any uncommon non-debt tax shields occasioned by the aggressive tax planning, e.g. transfer-pricing
shelters. We assume that there are no material transaction costs associated with tax planning.14 We introduce β to reflect the extent of tax
aggressiveness with zero representing the lowest tax-aggressive activities and no tax deductible and one representing the highest tax-
aggressive activities and full tax deductible. However, implementing tax planning strategies does not come without a cost. Selecting a
more aggressive tax planning will increase the probability p to pay a penalty Q. Therefore, pQ represents the expected value of paying a
tax penalty.
A firm’s assumed objective is to maximize its expectation of after-tax cash flow to its stock and debt holder, V, through its selection of
aggressive tax planning and debt utilization at time 0, which equals to:
1
V¼ ððM ð1 αÞ ð1 βÞ rDÞ ð1 τÞ þ rD þ M ð1 αÞ β pQÞ ð1ÞM ð1 αÞ rDM ð1 αÞ ð1 βÞ rD
1þυ
(1)
After simple algebraic operation, Eq. (1) can be simplified as:
1 1
V¼ ðM ð1 αÞ ð1 τÞ þ rDτ þ M ð1 αÞ βτ pQÞ ð2ÞV ¼ Mð1 th Þα ¼ 0β ¼ 0 (2)
1þυ 1 þ kl
where rDτ is debt-induced tax benefits, M ð1 αÞ βτ is tax benefits derived from aggressive tax planning and pQ is expected tax
penalty related to aggressive tax planning.
As a firm implements a more aggressive tax planning, it is more probable and faster to be caught by the taxing authority. Therefore,
the probability p should be an increasing function of the extent of tax aggressiveness β, that is to say, ∂∂βp > 0 and ∂∂βp2 > 0. Without loss of
2
generality, the probability p is assumed to take the form: p ¼ βn with n > 1.15 Moreover, as a firm increases the amount of debt, it will
incur higher agency cost. Therefore, the parameter α should also be an increasing function of the amount of debt, that is to say, ∂∂αD > 0.
Additionally, a firm’s cost of capital, υ, is also the function of corporate debt utilization. In traditional trade-off models, the cost of capital
schedule is u-shaped with respect to leverage.
The first-order condition to maximize a firm’s expected after-tax cash flow to its stock and debt holder is ∂∂Vβ ¼ 0, which is summarized
as:
M ð1 αÞ τ nβn1 Q ¼ 0 (3)
As the second-order condition ∂∂βV2 ¼ 1þ1 υ ðnðn 1Þβ

2 n2
QÞ is less than zero, Eq. (3) indicates that a firm can simultaneously choose its
tax plan and capital structure to maximize its expected after-tax cash flow to its stock and debt holder.16 Moreover, the relation between
corporate tax aggressiveness and corporate debt utilization is negative.,1718 Although we have assumed firms to simultaneously choose
their tax plan and capital structure to maximize their after-tax cash flow to their stock and debt holders, according to the empirical
finding of Graham and Tucker (2006), it is more likely that capital structure decisions follow from corporate tax planning and then
assumes a causal relationship from tax planning to capital structure decisions. Moreover, tax planning is a relatively less costly process
than changing a firm’s capital structure, which makes variability in tax planning more likely than capital structure adjustment.
Particularly, debt issuance and retirement is a relatively costly process, which makes it less attractive and convenient to implement. The
lack of convenience and high cost surely suggest that tax planning does not follow from capital structure decisions.19 Therefore, we
12
This assumption can be relaxed and there is no substantial influence on the predictions.
13
Theoretically, α is much closer to zero than to one. More importantly, even if a firm takes the capital structure of all debt, it does not necessarily
result in the complete loss of M, i.e. α ¼ 1.
14
This assumption can be relaxed and there is no substantial influence on the predictions.
15
There is no substantial influence on the predictions even if no exact form is assumed.
16
Eq. (3) does not indicate that only a capital structure of some degree of debt financing can be optimal. Because the substitution effect between
corporate tax aggressiveness and corporate debt utilization, many firms may prefer to a capital structure of all equity. This may depend on the
relation among M; β; τ and Q.
17
Another first-order condition related to the amount of debt is not presented here, which still derive the same prediction that the degree of tax
aggressiveness is inversely related to the debt amount.
18
Eq. (3) clearly demonstrates that there is an inversely relation between corporate tax aggressiveness and corporate debt utilization rather than
Lin’s et al. (2014) ambiguous inference that the aggressive firm is less likely to use debt due to the lower benefit derived from the interest tax shield.
19
If M is not constant or Q is adjustable subject to the taxing authority, it is also possible that a firm actively adopts tax-aggressive strategies,
depending on its expectation on M or Q, to ensure its capital structure experiences the least adjustment. We leave this issue to future research.
97
propose our first empirically testable hypothesis:

H1. Ceteris paribus, corporate debt utilization is inversely associated with corporate tax aggressiveness.
Now, we turn to discuss how a firm’s profitability affects the inverse association between corporate debt utilization and corporate tax
aggressiveness. Eq. (1) indicates that a firm can reduce its effective tax rate to zero, i.e. M ð1 αÞ ð1 βÞ ¼ rD, through two ways:
load enough debt or implement enough tax-aggressive strategies. Under such condition, the prediction that corporate debt utilization is
inversely associated with corporate tax aggressiveness holds true. However, if a firm is extremely profitable such that even if it can
exhaust every conceivable tax-aggressive strategy and still cannot drive its effective tax rate to zero, the previous prediction will not
sustain. Under such circumstance, the firm will have to load more debt to reduce its tax liability after it has pushed corporate tax
aggressiveness to its limit. This indicates that extremely profitable firms are more likely to engage in both aggressive tax planning and
debt use than their less profitable counterparts.20 This result allows us to propose our second empirically testable hypothesis:
H2. Ceteris paribus, the inverse association between corporate tax aggressiveness and corporate debt utilization is subject to a firm’s
profitability such that for extremely profitable firms the model holds that corporate tax aggressiveness and corporate debt utilization
may be complements rather than substitutes.
We now consider the impact of controlling government ownership on the inverse association between corporate tax aggressiveness
and corporate debt utilization. Government ownership can reduce the cost of debt if it lessens expropriation risk (Atanasov et al., 2010;
Jiang et al., 2010) or confers advantages such as preferential commercial treatments or implicit government bailout options (Borisova &
Megginson, 2011). Particularly, Chinese government-controlled corporations tend to be favored by financial institutions such that the
cost of debt is lower for government-controlled corporations, compared to privately-controlled corporations (Shailer & Wang, 2015).
Moreover, there is less management-creditor conflict and thus less debt-induced agency cost. Therefore, for any given amount of debt,
the values of parameter α is always smaller for government-controlled corporations than for privately-controlled corporations, i.e. aG <
αP . As the parameter α is an increasing function of the amount of debt, ∂∂αD > 0, to attain the same value for α, government-controlled
corporations could hold more mount of debt than privately-controlled corporations. Combine this with Eq. (3), we can draw the
conclusion that the same magnitude of tax aggressiveness changes can cause more corporate debt utilization adjustment for
government-controlled corporations than for privately-controlled corporations. This result allows us to propose our third empirically
testable hypothesis:
H3. Ceteris paribus, the inverse relation between corporate tax aggressiveness and corporate debt utilization is more pronounced for
government-controlled corporations than for privately-controlled corporations.
4. Research design
4.1. Sample selection
The sample used in this study consists of 1217 firms listed on the Chinese (Shanghai and Shenzhen) A-share stock market over the
2007–2016 period. On January 30, 2007, the China Securities Regulatory Commission (CSRC) issued a new standard for information
disclosure. The Administrative Measures on Information Disclosure by listed Companies resulted in important changes in the institu-
tional arrangements for Chinese listed companies and signaled a significant step towards International Financial Reporting Standards for
China. It is this new standard that provides the deferred tax data for our study.
Our sample selection period begins in 2007, the first year in which the deferred tax information is available, and ends in 2016, the
latest year for which financial statement information is currently available. The final sample consists of 4986 firm-year observations
after excluding firm-years fall into the following categories: (a) firms in severe financial distress/undergoing bankruptcy; (b) firms in the
financial industry sector; and (c) firms with missing observations on the variables in the regression model. All of our financial and tax
data were collected from the China Stock Market and Accounting (CSMAR) database and were winsorized at 1% and 99% to mitigate
reporting errors.21 Appendix A Table A1 provides detailed definitions of variables used in our empirical analysis.
4.2. Main variables
Following Lin et al. (2014), we compute four measures of firm’s leverage level. ALEV is defined as total debt, the quantity divided by
total assets. BLEV is defined as the industry-adjusted firm leverage, calculated as the firm’s total debt minus median industry leverage
multiplied by firm assets, scaled by total assets. CLEV refers to the ratio of long-term debt over total assets. DLEV refers to total debt,
scaled by the sum of total debt and equity.
Following Hanlon and Heitzman (2010), we take the view that tax avoidance constitutes any corporate activity that aims to reduce a
firm’s explicit tax liability. By now, the literature has produced various proposed measures of corporate tax avoidance. Since the
20
It should be noted that this prediction does not mean that there is no substitution effect between corporate tax aggressiveness and corporate debt
utilization for extremely profitable firms. It just has been cancelled out by the increased corporate debt utilization. Without the substitution effect,
these extremely profitable firms could have used even more debt. Under a hypothetical scenario, if there are unlimited tax-aggressive strategies, the
substitution effect will hold true even for extremely profitable firms.
21
We include firms that have negative earnings and negatives taxes paid. Earnings are winsorized too.
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measures emphasize different aspects of tax aggressiveness, to improve the robustness of our empirical results, we employ four proxy
measures of tax aggressiveness that have been widely used in prior research. The first one is current effective tax rate (CuETR).22
Following Cheng et al. (2012), CuETR is normally calculated as total tax expense less deferred tax expense scaled by pretax income.
CuETR thus measures a firm’s ability to reduce its income tax expenses compared with its pretax income and shows the relative tax
burden across firms. A lower CuETR indicates that firms avoid income tax by reducing their taxable income while maintaining their
financial accounting income, which suggests that CuETR is a suitable measure of tax aggressiveness (Dyreng et al., 2008; Frank et al.,
2009). It is expected that there is a positive relation between CuETR and firm’s leverage level. Consistent with prior literature, we
restrict CuETR to fall in the interval ½0; 1. Similarly, a more commonly used measure is the book or overall ETR, which is defined as total
tax expense divided by pretax income (Dyreng et al., 2010). The book ETR captures tax savings without including those from deferring
cash taxes to a later period.
Our third measure of tax aggressiveness is book-tax difference (BTD), computed as book income less taxable income scaled by lagged
total assets. Following Lin et al. (2014), our fourth measure of tax aggressiveness is a tax shelter prediction score (SHELTER, as computed
in Wilson, 2009).23 Specifically, tax shelter prediction score is calculated on a set of variables predicted to be associated with tax
sheltering. As there is a positive and significant relation between book-tax difference and incidence of tax sheltering, BTD (SHELTER)
has been proposed as a measure of tax aggressiveness (e.g. Wilson, 2009; Lin et al., 2014) since large differences between book income
and taxable income are typical among firms that exhibit greater avoidance behavior (Lisowsky, 2010). If firms engage in more
tax-aggressive activities, their BTD (SHELTER) will be higher. Therefore, we consider BTD (SHELTER) as another measure of tax
aggressiveness and expect that there is a negative relation between BTD (SHELTER) and firm’s leverage level.
4.3. Empirical model
The regression model used to empirically test the abovementioned three hypotheses is represented as follows:
Leveragei;t ¼ a þ β1 Tax aggressivenessi;t þ β2 SIZEi;t þ β3 NIi;t þ β4 SALESi;t þ β5 MBi;t þ β6 DIVi;t þ β7 COLLATERALi;t þ IND þ YEA
þ εi;t
(4)
where leverage is ALEV, BLEV, CLEV or DLEV in year t, tax aggressiveness is one of the four tax avoidance measures (SHELTER, BTD,
CuETR and ETR). All variables are defined in Appendix A.
To control for factors known to affect debt policy, we include the following variables in our model: firm size (SIZE), revenue (SALES),
market-to-book ratio (MB), dividend effect (DIV), net income (NI), collateral effect (COLLATERAL), industry effects and year effects.24
SIZE is the natural logarithm of total assets. SALES is defined as the total revenues of a firm. Both variables are included to capture any
economies of scale that exist in the issuance or use of debt. MB is the ratio of market to book value and is intended to control for
differences in growth opportunities. Growth firms typically have more asset purchases and thus have higher leverage level. DIV is a
dummy variable that takes the value of 1 if a firm pays a dividend, zero otherwise. Dividend-paying firms are hypothesized to have
strong financial position and thus have more debt capacity. NI is net income scaled by total assets and is included as a profitability
variable to reflect the most pervasive facts about debt policy that profitable firms use less debt (Myers, 1993). COLLATERAL is the ratio
of all collaterals scaled by total assets and is included to deal with another pervasive fact about debt policy is that firms with highly
collateralizable assets (e.g. inventory, property, plant, and equipment) use more debt. Industry dummy variables are included as control
variables to reflect possible debt policy fluctuations across different industry sectors. We include 13 industry dummy variables based on
the CSRC industry classifications. The industry dummies are coded as 1 if the firm is represented in a particular CSRC category,
otherwise 0. Finally, year dummy variables are included to control for possible differences in debt policy in China over the 2007–2016
financial years. The year dummies are coded as 1 if the year falls within a specific year category, otherwise 0.
5. Empirical results
5.1. Descriptive statistics
Table 1 Panel A, presents descriptive statistics for the sample. In terms of leverage measures, the average ratio of total debt to total
assets (ALEV) is about 23.3% during the sample period, with a median of 22.5%, while the average ratio of long-term debt to total assets
(CLEV) is about 9.3%, with a median of 5.1%. The average industry-adjusted leverage level (BLEV) is about 0.7%, with a median of
0.4%. At the same time, the data demonstrate considerable variation in leverage measures. For example, the 25th percentile of ALEV is
22
We note that proxy measure of tax avoidance based on CuETR has been effectively applied in prior Chinese studies (e.g. Wu et al., 2012; Wu &
Yue, 2009).
23
Wilson’s Shelter prediction score has been proved to be a natural and effective extension of BTD as a proxy for tax avoidance and has been widely
used in prior literature (e.g. Chung et al., 2018; Kim et al., 2011; Lin et al., 2014; Rego & Wilson, 2012). Kim et al. (2011) argue that this measure
focuses primarily on a firm’s tendency of undertaking an extreme form of tax avoidance and is capable of capturing the most aggressive and complex
tax sheltering activities, which is a suitable measure for our research question in term of providing the boundary of tax avoidance.
24
We use the same leverage control variables found in Graham and Tucker (2006), Frank and Goyal (2009) and Lin et al. (2014).
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Table 1
Descriptive statistics and correlations.
Panel A: Descriptive statistics
Variable Mean Standard deviation 25th percentile
ALEV 0.233 0.166 0.089

BLEV 0.007 0.158 0.125
CLEV 0.093 0.109 0.000
DLEV 0.363 0.244 0.154
SHELTER 10.67 0.961 10.05
BTD 0.008 0.055 0.011
CuETR 0.203 0.306 0.129
ETR 0.188 0.184 0.129
SIZE 22.53 1.376 21.55
NI 0.042 0.043 0.016
SALES 0.124 0.307 0.011
MB 2.045 1.278 1.239
DIV 0.731 0.443 0
COLLATERAL 0.414 0.181 0.281
EBIT 0.061 0.048 0.034
Panel B: Pearson (above the diagonal) and Spearman (below the diagonal) correlations
1 2 3 4 5 6 7
1 ALEV 0.949*** 0.713*** 0.925*** 0.050*** 0.243*** 0.067***

2 BLEV 0.952*** 0.606*** 0.873*** 0.009 0.122*** 0.060***
3 CLEV 0.727*** 0.643*** 0.654*** 0.174*** 0.268*** 0.052***
4 DLEV 0.934*** 0.883*** 0.703*** 0.139*** 0.230*** 0.092***
5 SHELTER 0.083*** 0.044*** 0.253*** 0.161*** 0.452*** 0.126***
6 BTD 0.314*** 0.197*** 0.359*** 0.298*** 0.313*** 0.395***
7 CuETR 0.117*** 0.093*** 0.125*** 0.163*** 0.060*** 0.574***
8 ETR 0.144*** 0.154*** 0.202*** 0.103*** 0.056*** 0.329*** 0.610***
9 SIZE 0.391*** 0.325*** 0.535*** 0.466*** 0.798*** 0.151*** 0.143***
10 NI 0.448*** 0.447*** 0.247*** 0.478*** 0.182*** 0.402*** 0.055***
11 SALES 0.267*** 0.244*** 0.317*** 0.366*** 0.734*** 0.119*** 0.134***
12 MB 0.407*** 0.350*** 0.409*** 0.477*** 0.324*** 0.229*** 0.123***
13 DIV 0.139*** 0.156*** 0.004 0.154*** 0.266*** 0.186*** 0.029**
14 COLLATERAL 0.389*** 0.318*** 0.312*** 0.394*** 0.035*** 0.199*** 0.117***
15 EBIT 0.279*** 0.285*** 0.151*** 0.316*** 0.184*** 0.331*** 0.016
only 8.9% and the 75th percentile is 35.2%. As tax aggressiveness measures are concerned, the mean (median) of SHELTER, BTD, CuETR
and ETR are 10.67 (10.57), 0.008 (0.004), 0.203 (0.187) and 0.188 (0.178), respectively. However, the data demonstrate relatively
lower variation in tax aggressiveness measures in comparison to leverage measures. For example, the 25th percentile of CuETR is 0.129
and the 75th percentile is 0.258, which is consistent with quantiles of CuETR reported in prior research. The remainder of Panel A of
Table 1 presents descriptive statistics for firm characteristics that could explain variation in leverage level. SIZE is the natural logarithm
of total assets. The mean SIZE is 22.53, corresponding to approximately RMB 6091 million of total assets. The average firm-year reports
RMB 1240 million in sales (mean SALES ¼ 0.124). For the mean firm-year, COLLATERAL constitutes 41.4% of total assets. On average,
firms have market values about 2.045 times over their book values (mean MB ¼ 2.045), while the average NI (EBIT) is about 4.2%
(6.1%) of the total assets.
Table 1 Panel B, presents the Pearson (above the diagonal) and Spearman (below the diagonal) correlations for these variables. BTD
is significantly and negatively correlated with CuETR and ETR since a lower tax rate corresponds to more tax aggressiveness. Using
Pearson correlations, ALEV is positively and significantly correlated with SHELTER, CuETR, ETR, SIZE, SALES, and COLLATERAL.25
ALEV is negatively and significantly correlated with BTD, NI, MB, DIV and EBIT. Similarly, correlations have been observed for BLEV,
CLEV, DLEV and SHELTER, BTD, CuETR, ETR, SIZE, NI, SALES, MB, DIV, COLLATERAL, EBIT.
5.2. Results for baseline regressions – H1
We use Eq. (4) to examine the effect of corporate tax aggressiveness on corporate debt utilization, represented by firms’ leverage
levels. Because we have four measures of leverage levels (ALEV, BLEV, CLEV, and DLEV) and four measures of tax aggressiveness
25
It seems that the significantly positive correlation between ALEV and SHELTER contradicts our hypothesis that leverage is negatively associated
with corporate tax aggressiveness. It may be due to the fact that the variable SHELTER uses leverage in its construction (see Appendix A for variables
definitions). However, this implicit bias toward fining a positive relation between leverage and corporate tax aggressive does not deter us from
finding an inverse relation between leverage and SHELTER, which makes it more compelling in light of this bias. Please see the following subsection
for detailed explanation.
100
Panel A: Descriptive statistics
25th percentile 50th percentile 75th percentile
0.089 0.225 0.352

0.125 0.004 0.119
0.000 0.051 0.153
0.154 0.369 0.557
10.05 10.57 11.23
0.011 0.004 0.026
0.129 0.187 0.258
0.129 0.178 0.252
21.55 22.31 23.31
0.016 0.036 0.063
0.011 0.027 0.078
1.239 1.661 2.355
0 1 1
0.281 0.404 0.548
0.034 0.054 0.084
Panel B: Pearson (above the diagonal) and Spearman (below the diagonal) correlations
8 9 10 11 12 13 14 15
0.054*** 0.361*** 0.417*** 0.075*** 0.344*** 0.143*** 0.378*** 0.289***

0.048*** 0.289*** 0.407*** 0.054*** 0.297*** 0.159*** 0.305*** 0.290***
0.091*** 0.461*** 0.215*** 0.119*** 0.289*** 0.001 0.283*** 0.149***
0.031** 0.445*** 0.447*** 0.184*** 0.396*** 0.159*** 0.389*** 0.321***
0.038** 0.802*** 0.184*** 0.597*** 0.198*** 0.261*** 0.039*** 0.175***
0.057*** 0.098*** 0.334*** 0.048*** 0.208*** 0.149*** 0.154*** 0.287***
0.393*** 0.064*** 0.014 0.037*** 0.037*** 0.001 0.081*** 0.003
0.059*** 0.029*** 0.030** 0.090*** 0.005 0.100*** 0.008
0.161*** 0.098*** 0.668*** 0.436*** 0.173*** 0.194*** 0.067***
0.078*** 0.108*** 0.037*** 0.418*** 0.374*** 0.207*** 0.965***
0.154*** 0.848*** 0.032** 0.199*** 0.098*** 0.063*** 0.036**
0.204*** 0.565*** 0.413*** 0.471*** 0.014 0.243*** 0.384***
0.001 0.177*** 0.391*** 0.162*** 0.014 0.103*** 0.330***
0.176*** 0.192*** 0.209*** 0.170*** 0.282*** 0.106*** 0.121***
0.010 0.060*** 0.939*** 0.032** 0.355*** 0.338*** 0.111***
This table reports descriptive statistics (Panel A) and correlations (Panel B) for the variables used in our study. The sample contains 4986 firm-years
covering the period 2007–2016 for 1217 firms. See Appendix A for variable definitions. All data are winsorized at the 1% and 99% percent levels. All
financial statement data are acquired from the annual fundamentals database maintained by CSMAR.
(SHELTER, BTD, CuETR and ETR), we obtain sixteen sets of regression results. Table 2 reports our findings. Columns (1)–(4) present the
coefficients from the regression when the corporation’s debt level (total debt scaled by total assets) is the dependent variable (ALEV).
Specifically, in Column (1), the coefficient on SHELTER is 0.0624 with p value less than 1%, indicating that tax aggressiveness reduces
firm’s leverage level by 6.24%. Similarly, in Column (2), the coefficient on BTD is 0.2112 with p value less than 1%, indicating that tax
aggressiveness reduces firm’s leverage level by 21.12%. By contrast, in Column (3), the coefficient on CuETR is 0.0104 with p value less
than 10%, indicating a higher level of effective tax rate increases firm’s leverage level by 1.04%. Similarly, in Column (4), the coefficient
on ETR is 0.0257 with p value less than 1%, indicating a higher level of effective tax rate increases firm’s leverage level by 2.57%. As
higher CuETR and ETR indicate a lower level of tax aggressiveness, the coefficients on CuETR and ETR also indicate a negative relation
between firm’s leverage level and tax aggressiveness. Overall, the empirical findings suggest that a firm’s debt use is significantly and
negatively associated with its tax aggressiveness, whether measured by SHELTER, BTD, CuETR or ETR.
In addition, Columns (1)–(4) present the results of regression models accommodating control variables. The significant and negative
coefficient on NI indicates that profitable firms use less debt and thus have lower leverage levels. Similar implication could be derived
from the significant and negative coefficient on SALES. Both results indicate that a better performed firm is able to decrease its debt level
by using its self-generated profit. In addition, the coefficient on COLLATERAL indicate that firms with collateralizable assets find it
easier to access outside financing and thus use more debt. Furthermore, the estimated coefficient on DIV implies that dividend-paying
firms use less debt than nondividend firms. The market-to-book ratio is not significant in this regression. The significant and positive
coefficient on SIZE indicates that large firms have higher leverage levels. These results associated with various controlling variables are
broadly consistent with those of Graham and Tucker (2006), Frank and Goyal (2009) and Lin et al. (2014). Finally, the adjusted
R-squared reported in Columns (1)–(4) are 43.88%, 46.07%, 40.28% and 42.51%, respectively, indicating a good fit.
To further investigate the robustness of our empirical findings, Columns (5)–(16) present regression results using alternative
measures of leverage. Columns (5)–(8) use industry-adjusted leverage (BLEV) as the dependent variable. Industry-adjusted leverage
level is calculated as the firm’s total debt minus median industry leverage multiplied by firm assets, scaled by total assets. Similar to
empirical findings related to ALEV, it is also observed that a firm’s leverage level is negatively associated with its tax aggressiveness,
even adjusted by industry leverage levels. In particular, the coefficient on SHELTER (BTD) is 0.0622 (0.1997) with p value less than
1%, while the coefficient on CuETR (ETR) is 0.0106 (0.0273) with p value less than 10%. The coefficients of controlling variables have
similar sign and significance, further corroborating the robustness of our empirical findings. In addition, Columns (9)–(12) use the ratio
101
Table 2
Baseline regressions and alternative definitions.
Variable (1) (2) (3) (4) (5) (6) (7)
ALEV ALEV ALEV ALEV BLEV BLEV BLEV
SHELTER 0.0624*** 0.0622***

(-11.26) (-11.26)
BTD 0.2112*** 0.1997***
(-5.87) (-5.49)
CuETR 0.0104* 0.0106*
(1.71) (1.71)
ETR 0.0257***
(3.08)
SIZE 0.0885*** 0.0555*** 0.0519*** 0.0558*** 0.0884*** 0.0432*** 0.0519***
(17.77) (27.22) (23.67) (27.29) (17.77) (20.92) (23.67)
NI 0.9242*** 1.0948*** 1.2268*** 1.1678*** 0.9243*** 1.0756*** 1.2267***
(-12.00) (-20.56) (-23.44) (-22.47) (-12.01) (-19.95) (-23.44)
SALES 0.1157*** 0.1388*** 0.1297*** 0.1386*** 0.1157*** 0.1109*** 0.1297***
(-8.94) (-16.87) (-15.39) (-16.81) (-8.93) (-13.33) (-15.39)
MB 0.0017 0.0007 0.0028 0.0012 0.0016 0.0003 0.0028
(0.56) (-0.41) (-0.69) (-1.44) (0.56) (0.22) (-1.44)
DIV 0.0116* 0.0211*** 0.0153*** 0.0223*** 0.0115* 0.0229*** 0.0153***
(-1.67) (-4.49) (-3.26) (-4.75) (-1.67) (-4.83) (-3.26)
COLLATERAL 0.1693*** 0.2089*** 0.1827*** 0.2134*** 0.1694*** 0.1462*** 0.1827***
(7.74) (19.31) (16.26) (19.64) (7.74) (13.36) (16.26)
Constant 1.1316*** 1.0229*** 0.9372*** 1.0292*** 1.1948*** 0.9504*** 1.0004***
(-11.03) (-22.25) (-10.40) (-22.30) (-11.65) (-20.41) (-10.40)
Industry dummy Yes Yes Yes Yes Yes Yes Yes
Year dummy Yes Yes Yes Yes Yes Yes Yes
Observations 4986 4986 4986 4986 4986 4986 4986
Adj. R2 0.4388 0.4607 0.4028 0.4251 0.3779 0.3636 0.3379
In this table, we report the results of estimating Eq. (4), which is an ordinary least squares regression of alternative leverage indicators on firm
characteristics. In Columns (1)–(4), the dependent variable is leverage as measured by ALEV, equal to long-term debt plus debt in current liabilities
all over total assets. All right-hand side variables are lagged by one year except for tax aggressiveness measures. We use four measures of tax
aggressiveness, including a shelter prediction score by Wilson (2009), the current effective tax rate (CuETR), the book-tax differences (BTD) and
the effective tax rate (ETR). We control for other factors known to reliably explain leverage use, including firm size, revenue, net income, market to
book, dividend, and collateral. All variables are as defined in Appendix A. In Columns (5)–(8), the dependent variable is industry adjusted leverage
(BLEV) which is equal to firm debt minus median industry leverage multiplied by firm asset, scaled by total assets. In Columns (9)–(12), the
dependent variable is CLEV, equal to the ratio of long-term debt and firm asset. In Columns (13)–(16), the dependent variable is DLEV, equal to
long-term debt plus debt in current liabilities all over market value. All variables are winsorized at the 1% and 99% levels. All regressions include
industry and year dummies. The t-stats reported in parentheses below the coefficient estimates are based on heteroskedasticity-consistent standard
errors that are adjusted for clustering at the firm level. ***, **, and * represent statistical significance at the 1%, 5% and 10% level, respectively.
of long-term debt to total assets (CLEV) while Columns (13)–(16) use the ratio of total debt to the sum of total debt and total equity
(DLEV). All regression specifications are similar to those reported in Columns (1)–(4). Overall, these analyses quantify that a firm’s tax
aggressiveness has significantly negative impact on its leverage level.26
5.3. Results for baseline regressions subject to firm’s profitability – H2
Having shown a negative association between firm’s leverage level and its tax aggressiveness, we now turn to testing our second
hypothesis, which is that the inverse association between corporate tax aggressiveness and corporate debt utilization is subject to firm’s
profitability. Although previous findings suggest a firm’s debt use is inversely associated with its tax aggressiveness, it should be
interpreted in a cautious way as a firm always faces a limit on how aggressive its tax planning can be and thus the consequences for its
capital structure decision. If a firm’s profit is high enough to absorb all its tax planning efforts, in order to further drive down its effective
tax rate, it may still engage in debt use.
Firstly, we screen out firms with positive EBIT and classify them into two groups: low profit firms as below median EBIT profit and
high profit firms as above median EBIT profit. In Table 3, Panel A, we present the results from estimating Eq. (4) for low profit firms
(Columns (1)–(4)) and high profit firms (Columns (5)–(8)).27 We find that tax aggressiveness proxy, measured by SHELTER and BTD,
26
Initially, we only use and report results from tests involving contemporaneous measures of leverage and tax aggressiveness and lagged controlling
variables. We further test the regression model with lagged tax aggressiveness variables and obtain qualitatively similar results. Due to brevity, we do
not report results here.
27
For the sake of brevity, we do not report the coefficients on controlling variables. The estimated coefficients for the controlling variables are
qualitatively unchanged. We take the same approach for the following Table 4 to Table 7.
102
(8) (9) (10) (11) (12) (13) (14) (15) (16)
BLEV CLEV CLEV CLEV CLEV DLEV DLEV DLEV DLEV
0.0481*** 0.0727***
(-20.43) (-14.27)
0.0452* 0.3531***
(-1.87) (-7.06)
0.0026 0.0232***
(0.65) (2.76)
0.0273** 0.0011** 0.0431***
(2.64) (2.83) (3.03)
0.0435*** 0.0693*** 0.0324*** 0.0411*** 0.0511*** 0.1245*** 0.0841*** 0.0818*** 0.0845***
(21.03) (35.54) (31.38) (28.66) (36.46) (29.52) (29.61) (26.94) (29.67)
1.1436*** 0.1139*** 0.2244*** 0.3464*** 0.3414*** 1.4236*** 1.6261*** 1.7776*** 1.7521***
(-21.75) (-3.27) (-6.23) (-10.12) (-9.59) (-18.92) (-21.93) (-24.52) (-24.19)
0.1109*** 0.0862*** 0.0633*** 0.0970*** 0.1138*** 0.1124*** 0.1268*** 0.1287*** 0.1269***
(-13.29) (-16.21) (-25.35) (-17.61) (-20.16) (-9.77) (-11.08) (-11.03) (-11.04)
0.0002 0.0051*** 0.0022* 0.0015 0.0018 0.0031 0.0059** 0.0081*** 0.0063**
(-0.13) (4.05) (-1.89) (1.17) (1.48) (-1.13) (-2.33) (-3.01) (-2.50)
0.0241*** 0.0009 0.0033 0.0038 0.0031 0.0359*** 0.0455*** 0.0401*** 0.0475***
(-5.08) (-0.31) (-0.98) (-1.23) (-0.96) (-5.64) (-6.97) (-6.18) (-7.25)
0.1513*** 0.0583*** 0.0972*** 0.0692*** 0.0932*** 0.2579*** 0.2962*** 0.2722*** 0.3001***
(13.75) (8.25) (13.38) (9.42) (12.52) (16.87) (19.64) (17.48) (19.81)
0.9579*** 0.9793*** 0.6185*** 0.8272*** 1.0702*** 1.6739*** 1.5218*** 1.4519*** 1.5378***
(-20.44) (-17.15) (-25.76) (-14.03) (-33.86) (-13.56) (-23.77) (-11.63) (-23.92)
Yes Yes Yes Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes Yes Yes
4986 4986 4986 4986 4986 4986 4986 4986 4986
0.3324 0.4569 0.4009 0.4113 0.3829 0.4902 0.4793 0.4701 0.4827
has significantly negative coefficients of 0.0610 and 0.4025 for low profit firms as well as 0.0491 and 0.1093 for high profit firms.
At the same time, another tax aggressiveness proxy, measured by CuETR and ETR, has significantly positive coefficients of 0.0235 and
0.0544 for high profit firms and insignificant coefficients of 0.0033 and 0.0074 for low profit firms. To test the difference in the tax
aggressiveness coefficients across different profit groups, we employ a bootstrap approach,28 which reveals that there is significant
difference between low profit firms and high profit firms, indicating that the debt substitution hypothesis holds strongly for low profit
firms than for high profit firms.
Secondly, to further test hypothesis 2, we identify the top 10% and 5% of profitable firms. In Table 3, Panel B, we present the results
from estimating Eq. (4) for higher profit firms (upper 10% of EBIT, Columns (9)–(12)) and highest profit firms (upper 5% of EBIT,
Columns (13)–(16)). We find that tax aggressiveness proxy, measured by SHELTER and BTD, still has significantly negative coefficient
for the higher profit firms (0.0211 and 0.0941). However, for the highest profit firms, the coefficient on SHELTER and BTD is not
significant even it is still negative. At the same time, another tax aggressiveness proxy, measured by CuETR and ETR, has significantly
negative coefficient for higher profit firms (0.0433 and 0.1088) as well as highest profit firms (0.0677 and 0.1247). For the
SHELTER (BTD) measure, the absolute value of its coefficient is gradually decreasing from 0.0491 (0.1093) for the high profit firms to
0.0068 (0.0114) for the highest profit firms as well as its corresponding significance level, which suggests that support for the debt
substitution hypothesis is gradually declining. For the CuETR (ETR) measure, its coefficient is decreasing from 0.0235 (0.0544) for the
high profit firms to 0.0677 (0.1247) for the highest profit firms. Not only its absolute value is increasing but also its sign has reversed
from positive to negative when still keeping its significance level. This indicates that when a firm’s profitability is high enough, the
substitution effect will be replaced by the complementary effect between tax aggressiveness and debt utilization. To provide statistical
evidence to this statement, we further test the difference in the tax aggressiveness coefficients across three high profit groups. By
employing a bootstrap approach, we find that all the SHELTER, BTD, CuETR and ETR measures are significantly different among high
profit, higher profit, and highest profit groups, which provides sounding evidence to our previous finding. Overall, our evidence sup-
ports the hypothesis that the substitution effect between corporate tax aggressiveness and corporate debt utilization is subject to firm’s
profitability and for extremely profitable firms corporate tax aggressiveness and corporate debt utilization can be complementary.
28
To statistically assess the characteristics of the difference in the tax aggressiveness coefficients across different sample groups, the inference in the
empirical part is based on bootstrap methods. We apply the following bootstrap procedure: 1) estimate the parameters of the model in Eq. (4); 2)
generate bootstrap residuals by drawing with replacement from the set of estimated residuals; 3) construct a bootstrap sample using the estimated
parameters from step 1 and the bootstrap residuals from step 2; 4) reestimate the parameters from the sample generated in step 3; 5) repeat step 2 to
step 4 for 1000 times; 6) from the bootstrap distributions of the statistics of interest derived from two different sample groups, e.g. the coefficient of
SHELTER, BTD, CuETR and ETR, we test the significance of the difference in the tax aggressiveness coefficients across different groups.
103
X. Jin
Table 3
Firms’ profitability: tax aggressiveness and debt utilization.
Panel A: Firms with positive profit
Low profit (lower 50% of EBIT) High profit (upper 50% of EBIT) Difference
(1) (2) (3) (4) (5) (6) (7) (8) (1)–(5) (2)–(6) (3)–(7) (4)–(8)
ALEV ALEV ALEV ALEV ALEV ALEV ALEV ALEV
SHELTER 0.0610*** 0.0491*** 0.0119***

(-11.35) (-9.44) (-92.21)
BTD 0.4025*** 0.1093** 0.2932***
(-10.71) (-2.21) (-159.37)
CuETR 0.0033 0.0235** 0.0205***
(0.44) (2.08) (-51.75)
ETR 0.0074 0.0544** 0.0470***
(0.59) (2.51) (-35.41)
Observations 2373 2373 2373 2373 2374 2374 2374 2374
Adj. R2 0.4344 0.3265 0.4034 0.3894 0.4222 0.3902 0.4014 0.3271
Panel B: Firms with extremely positive profit
Higher profit (upper 10% of EBIT) Highest profit (upper 5% of EBIT) Difference
(9) (10) (11) (12) (13) (14) (15) (16)
SHELTER 0.0211*** 0.0068 (5)–(9) (5)–(13) (9)–(13)
(-2.34) (-0.65) 0.0280*** 0.0423*** 0.0143***
104
(-97.97) (-129.88) (-35.69)
BTD 0.0941** 0.0114 (6)–(10) (6)–(14) (10)–(14)

(-2.48) (-1.21) 0.0152*** 0.0979*** 0.0830***
(-52.94) (-65.32) (-14.36)
CuETR 0.0433* 0.0677** (7)–(11) (7)–(15) (11)–(15)
(-1.74) (-1.99) 0.0668*** 0.0912*** 0.0244***

(78.44) (90.11) (25.22)
ETR 0.1088** 0.1247** (8)–(12) (8)–(16) (12)–(16)
(-2.39) (-2.78) 0.1632*** 0.1791*** 0.0159***
(84.42) (76.16) (81.19)
Observations 476 476 476 476 238 238 238 238
Adj. R2 0.3577 0.3487 0.3542 0.3502 0.3422 0.3092 0.3529 0.3179
In this table, we examine whether the substitution effect between corporate debt utilization and corporate tax aggressiveness holds true for more profitable firms. In Panel A we identified firms with positive
EBIT and divide them into two groups: Low profit firms as lower 50% of EBIT and High profit firms as upper 50% of EBIT; In Panel B we identified firms with positive EBIT and proposed two groups: Higher
profit firms as upper 10% of EBIT and Highest profit firms as upper 5% of EBIT. The dependent variable is leverage as measured by ALEV, equal to long-term debt plus debt in current liabilities all over total
assets. All right-hand side variables are lagged by one year except for tax aggressiveness measures. We use four measures of tax aggressiveness, including a shelter prediction score by Wilson (2009), the
current effective tax rate (CuETR), the book-tax differences (BTD) and the effective tax rate (ETR). We control for other factors known to reliably explain leverage use, including firm size, revenue, net
income, market to book, dividend, and collateral. In Panel A and Panel B, we do not report controls for brevity. All variables are as defined in Appendix A. All variables are winsorized at the 1% and 99%
levels. All regressions include industry and year dummies. The t-stats reported in parentheses below the coefficient estimates are based on heteroskedasticity-consistent standard errors that are adjusted for
clustering at the firm level. we use a bootstrap approach to test the difference in the leverage coefficients across different profitability groups and the t-stats are reported in parentheses below the coefficient
estimates. ***, **, and * represent statistical significance at the 1%, 5% and 10% level, respectively.
X. Jin
Table 4
Governmental ownership: tax aggressiveness and debt utilization.
Panel A: All firms
Government-controlled corporations Privately-controlled corporations Difference
(1) (2) (3) (4) (5) (6) (7) (8) (1)–(5) (2)–(6) (3)–(7) (4)–(8)
SHELTER 0.0822*** 0.0391*** 0.0431***

(-16.77) (-7.52) (-197.73)
ETD 0.2537*** 0.2082*** 0.0455***
(-19.13) (-3.95) (-19.65)
CuETR 0.0073 0.0201** 0.0128***
(0.97) (1.98) (-21.35)
ETR 0.0017 0.0021** 0.0004
(0.21) (1.91) (-0.51)
Observations 3037 3037 3037 3037 1949 1949 1949 1949
Adj. R2 0.4390 0.3801 0.3868 0.3867 0.4621 0.4461 0.4474 0.4473
Panel B: Large firms (upper quartile of total assets)

Government-controlled corporations Privately-controlled corporations Difference
(9) (10) (11) (12) (13) (14) (15) (16) (9)–(13) (10)–(14) (11)–(15) (12)–(16)
105
SHELTER 0.1904*** 0.0523*** 0.1381***

(-15.89) (-4.23) (-266.61)
ETD 0.6104*** 0.1435*** 0.4669***
(-3.89) (-3.25) (-72.11)
CuETR 0.0049 0.0230*** 0.0181***
(0.29) (2.85) (-4.23)
ETR 0.0009 0.0199*** 0.0190***

(0.38) (2.93) (-9.01)
Observations 759 759 759 759 487 487 487 487
Adj. R2 0.5659 0.4009 0.4163 0.4161 0.3405 0.3105 0.3162 0.3159
In this table, we examine whether the substitution effect between corporate debt utilization and corporate tax aggressiveness holds true for government-controlled corporations and privately-controlled
corporations as well as whether the substitution effect between corporate debt utilization and corporate tax aggressiveness is more pronounced for government-controlled corporations. We identified
government-controlled corporations as those with the national, provincial or local governments as their controlling shareholder. In Panel A, we use all available observations. In Panel B, we use only
observations in the largest quartile of total assets. The dependent variable is leverage as measured by ALEV, equal to long-term debt plus debt in current liabilities all over total assets. All right-hand side
variables are lagged by one year except for tax aggressiveness measures. We use four measures of tax aggressiveness, including a shelter prediction score by Wilson (2009), the current effective tax rate
(CuETR), the book-tax differences (BTD) and the effective tax rate (ETR). We control for other factors known to reliably explain leverage use, including firm size, revenue, net income, market to book,
dividend, and collateral. In Panel A and Panel B, we do not report controls for brevity. All variables are as defined in Appendix A. All variables are winsorized at the 1% and 99% levels. All regressions
include industry and year dummies. The t-stats reported in parentheses below the coefficient estimates are based on heteroskedasticity-consistent standard errors that are adjusted for clustering at the firm
level. We use a bootstrap approach to test the difference in the leverage coefficients across different ownership groups and the t-stats are reported in parentheses below the coefficient estimates. ***, **, and
* represent statistical significance at the 1%, 5% and 10% level, respectively.
Table 5
Sensitivity of results to fixed-firm and fixed-year effects.
Variable (1) (2) (3) (4) (5) (6) (7)
ALEV ALEV ALEV ALEV BLEV BLEV BLEV
SHELTER 0.0326*** 0.0325***

(-13.94) (-13.94)
BTD 0.1351*** 0.1355***
(-5.81) (-5.82)
CuETR 0.0109*** 0.0109***
(2.98) (2.98)
ETR 0.0126*
(1.93)
Observations 4986 4986 4986 4986 4986 4986 4986
Adj. R2 0.1062 0.0941 0.0622 0.0869 0.1062 0.0941 0.0622
5.4. Results for baseline regressions subject to government ownership – H3
We now turn to testing the influence of government ownership on the substitution effect between corporate debt utilization and
corporate tax aggressiveness. Specially, we examine whether the substitution effect between corporate debt utilization and corporate tax
aggressiveness holds true for government-controlled corporations and privately-controlled corporations as well as whether the sub-
stitution effect between corporate debt utilization and corporate tax aggressiveness is more pronounced for government-controlled
corporations. We identify government-controlled corporations as those with the national, provincial or local governments as their
controlling shareholder. In Table 4, Panel A we present the results from estimating Eq. (4) for only government-controlled corporations
(Columns (1)–(4)) and only privately-controlled corporations (Columns (5)–(8)). We find that tax aggressiveness proxy, measured by
SHELTER and BTD, has significantly negative coefficients for government-controlled corporations (0.0822 and 0.2537) as well as
privately-controlled corporations (0.0391 and 0.2082). At the same time, another tax aggressiveness proxy, measured by CuETR and
ETR, has significantly positive coefficient for privately-controlled corporations (0.0201 and 0.0021) and has insignificant coefficient for
government-controlled corporations (0.0073 and 0.0017). To provide statistical evidence, we also employ a bootstrap approach to test
the difference in the tax aggressiveness coefficients across different groups, which reveals that the SHELTER (ETD and CuETR) measure
is significantly different from one another and the ETR measure is not significantly different from one another. Broadly speaking, such
findings indicate that the debt substitute hypothesis holds true for both the government-controlled corporations as well as the privately-
controlled corporations. More importantly, we can draw the conclusion that the substitution effect between corporate tax aggressiveness
and corporate debt utilization is more pronounced for government-controlled corporations as the absolute value of the coefficient on
SHELTER (BTD) is larger for the government-controlled corporations than for the privately-controlled corporations and the absolute
value of the coefficient on CuETR (ETR) is smaller for the government-controlled corporations than for the privately-controlled
corporations.
As government-controlled corporations and privately-controlled corporations likely differ on a number of dimensions, the above-
mentioned conclusion should be interpreted in detail. For example, government-controlled corporations are on average much larger
than privately-controlled corporations. To address this potential confound, in Panel B of Table 4, we retain only firm-years in the upper
quartile of total assets for the sample and test hypothesis 3. Empirical results reported in Panel B also support hypothesis 3 that the
substitution effect between corporate tax aggressiveness and corporate debt utilization is more pronounced for government-controlled
corporations than for privately-controlled corporations.
5.5. Robustness checks
We perform several robustness checks to the main specification. First, we address the potential for endogeneity by applying a fixed-
firm, fixed-year model. This should control for unobserved relations between tax aggressiveness and debt utilization that are not
captured by the other variables, and also to capture effects that may change inter-temporally. Table 5 reports the results of estimating Eq.
(4) with fixed-firm and fixed-year effects. Fixed-firm effect is based on firm name and fixed-year effect is based on fiscal year. The
coefficients on the tax aggressiveness variables are relatively smaller in absolute magnitude than their counterpart summarized in
Table 2, but are still statistically significant. Therefore, our main finding that there is an inverse relation between tax aggressiveness and
leverage level holds on a within-firm and time-varying basis. Moreover, to further address the endogeneity issue that whether tax
aggressiveness does reduce firms’ debt utilization or low-leverage firms just happen to be tax aggressive, we separate our sample into
high- and low-leverage subsamples, which are defined as observations having above- and below-median levels of the ratio of total debt
to total assets, i.e. ALEV. Unreported results show that the substitution effect is more pronounced for high-leverage firms than for low-
leverage firms. In an alternative way, we follow Graham and Tucker (2006) and use an endogenous switching model, which recognizes
that the tax aggressiveness might be endogenous to debt policy. Unreported results of this approach also indicate that there is an inverse
relation between tax aggressiveness and debt utilization, corroborating our main findings.
Another robustness check is to examine whether the substitution effect between corporate tax aggressiveness and corporate debt
utilization holds true during the crisis and non-crisis periods as well as whether the substitution effect between corporate tax
106
(8) (9) (10) (11) (12) (13) (14) (15) (16)
BLEV CLEV CLEV CLEV CLEV DLEV DLEV DLEV DLEV
0.0198*** 0.0346***
(-10.83) (-10.65)
0.0145 0.1718***
(-0.79) (-5.35)
0.0043 0.0107**
(1.50) (2.12)
0.0173* 0.0048 0.0234**
(1.93) (0.62) (2.62)
4986 4986 4986 4986 4986 4986 4986 4986 4986
0.0869 0.0950 0.0699 0.0674 0.0698 0.1122 0.1135 0.0866 0.1084
In this table, we report the results of estimating Eq. (4) with fixed-firm and fixed-year effects. Fixed-firm effect is based on firm name and fixed-year
effect is based on fiscal year. In Columns (1)–(4), the dependent variable is leverage as measured by ALEV, equal to long-term debt plus debt in current
liabilities all over total assets. All right-hand side variables are lagged by one year except for tax aggressiveness measures. We use four measures of tax
aggressiveness, including a shelter prediction score by Wilson (2009), the current effective tax rate (CuETR), the book-tax differences (BTD) and the
effective tax rate (ETR). We control for other factors known to reliably explain leverage use, including firm size, revenue, net income, market to book,
dividend, and collateral. We do not report controls for brevity. All variables are as defined in Appendix A. In Columns (5)–(8), the dependent variable is
industry adjusted leverage (BLEV) which is equal to firm debt minus median industry leverage multiplied by firm asset, scaled by total assets. In
Columns (9)–(12), the dependent variable is CLEV, equal to the ratio of long-term debt and firm asset. In Columns (13)–(16), the dependent variable is
DLEV, equal to long-term debt plus debt in current liabilities all over market value. All variables are winsorized at the 1% and 99% levels. The t-stats
reported in parentheses below the coefficient estimates are based on heteroskedasticity-consistent standard errors that are adjusted for clustering at the
firm level. ***, **, and * represent statistical significance at the 1%, 5% and 10% level, respectively.
aggressiveness and corporate debt utilization is less pronounced during the crisis period than the non-crisis period. This represents a
natural experiment of Chen’s (2010) dynamic capital structure model that demonstrates how trade-off between the tax benefits of debt
and the deadweight losses of default determines the optimal capital structure and thus enriches the tax benefits to a broader continuum.
We split the whole sample into two sub samples: the financial crisis of 2007–2008 period (2007–2008) and the non-crisis period
(2009–2016). The crisis period has 652 firm-year observations while the remaining non-crisis period contains 4334 firm-year obser-
vations. We rerun regressions in the refined subsamples and get results reported in Table 6 that are qualitatively the same as reported in
Table 2. This once again confirms our main finding that the debt policy of a firm is associated with its tax aggressiveness no matter how
macroeconomic conditions are. Moreover, as anticipated, by employing a bootstrap approach, we find that such association is statis-
tically less sensitive in the crisis period than in non-crisis period.
Finally, we address the issue that whether the substitution effect between corporate tax aggressiveness and corporate debt utilization
holds true for small and large firms as well as whether the substitution effect between corporate tax aggressiveness and corporate debt
utilization is more pronounced for large firms than for small firms.29 We split the whole sample into two sub samples and identify large
firms as those with total assets greater than the median of total assets. We rerun regressions in the refined subsamples and get results
reported in Table 7 that are qualitatively the same as reported in Table 2. Once again, we find that the tax aggressiveness of a firm is
inversely associated with its debt policy. Furthermore, we find that the substitution effect between corporate tax aggressiveness and
corporate debt utilization is more pronounced for large firms than for small firms. This size effect is likely due to the expertise possessed
by large firms to implement the substitution strategy and elaborately designed company structure to support such strategy.
6. Conclusion
In this paper, we propose a simple theoretical model based on the trade-off theory to illustrate how the presence of tax aggressiveness
affects capital structure decisions. Empirical evidence robustly supports the prediction that traditional interest tax shield may be a
weaker determinant of debt utilization than previously thought and corporate tax aggressiveness can lead to reduced corporate leverage
level. We also find that the association between corporate tax aggressiveness and corporate debt policy 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. We also find that the association between corporate tax aggressiveness and corporate debt policy
is statistically less sensitive in the crisis period than in non-crisis period. Finally, by focusing on Chinese publicly listed firms, where
government ownership is more prevalent and persistent, we find that government ownership help strengthened the association between
corporate tax aggressiveness and corporate debt policy. Overall, our study provides solid evidence that the capital structure as well as tax
shield theories developed from a Western economic perspective can be applied to present-day China. It also deepens our understanding
of the determinants of capital structure in a fast-growing emerging economy.
29
This robustness check represents a cross-sectional test.
107
X. Jin
Table 6
Sensitivity of results to the financial crisis of 2007–2008.
Crisis period Non-crisis period Difference
(1) (2) (3) (4) (5) (6) (7) (8) (1)–(5) (2)–(6) (3)–(7) (4)–(8)
SHELTER 0.0424*** 0.0686*** 0.0262***

(-5.42) (-16.52) (83.91)
ETD 0.1544*** 0.1828*** 0.0284***
(-3.62) (-4.33) (26.82)
CuETR 0.0250* 0.0057 0.0193***
(1.82) (0.83) (44.37)
ETR 0.0034** 0.0004 0.0030***
108
(2.52) (0.039) (5.83)

Observations 652 652 652 652 4334 4334 4334 4334
Adj. R2 0.3118 0.2738 0.2835 0.2775 0.4533 0.4153 0.4188 0.4108
In this table, we examine whether the substitution effect between corporate tax aggressiveness and corporate debt utilization holds true during the crisis and non-crisis periods as well as whether the
substitution effect between corporate tax aggressiveness and corporate debt utilization is less pronounced during the crisis period than the non-crisis period. We split the whole sample into two sub samples:
the financial crisis of 2007–2008 period (2007–2008) and the non-crisis period (2009–2016). The dependent variable is leverage as measured by ALEV, equal to long-term debt plus debt in current liabilities

all over total assets. All right-hand side variables are lagged by one year except for tax aggressiveness measures. We use four measures of tax aggressiveness, including a shelter prediction score by Wilson
(2009), the current effective tax rate (CuETR), the book-tax differences (BTD) and the effective tax rate (ETR). We control for other factors known to reliably explain leverage use, including firm size,
revenue, net income, market to book, dividend, and collateral. We do not report controls for brevity. All variables are as defined in Appendix A. All variables are winsorized at the 1% and 99% levels. All
regressions include industry and year dummies. The t-stats reported in parentheses below the coefficient estimates are based on heteroskedasticity-consistent standard errors that are adjusted for clustering
at the firm level. We use a bootstrap approach to test the difference in the leverage coefficients across different ownership groups and the t-stats are reported in parentheses below the coefficient estimates.
***, **, and * represent statistical significance at the 1%, 5% and 10% level, respectively.
X. Jin
Table 7
Sensitivity of results to firm size.
Small firm (low 50% of total assets) Large firm (upper 50% of total assets) Difference
(1) (2) (3) (4) (5) (6) (7) (8) (1)–(5) (2)–(6) (3)–(7) (4)–(8)
SHELTER 0.0457*** 0.0944*** 0.0487***

(-9.74) (-16.81) (228.25)
ETD 0.2320*** 0.2511*** 0.0109**
(-5.22) (-3.91) (2.73)
CuETR 0.0111 0.0129 0.0018***
(1.38) (1.44) (23.03)
ETR 0.0051 0.0016 0.0035***
109
(0.11) (0.34) (9.74)

Observations 2493 2493 2493 2493 2493 2493 2493 2493
Adj. R2 0.3333 0.3093 0.3082 0.3062 0.4196 0.3426 0.3536 0.3526
In this table, we examine whether the substitution effect between corporate tax aggressiveness and corporate debt utilization holds true for small and large firms as well as whether the substitution effect
between corporate tax aggressiveness and corporate debt utilization is more pronounced for large firms than small firms. We split the whole sample into two sub samples. We identified large firms as those
with total assets greater than the median of total assets. The dependent variable is leverage as measured by ALEV, equal to long-term debt plus debt in current liabilities all over total assets. All right-hand

side variables are lagged by one year except for tax aggressiveness measures. We use four measures of tax aggressiveness, including a shelter prediction score by Wilson (2009), the current effective tax rate
(CuETR), the book-tax differences (BTD) and the effective tax rate (ETR). We control for other factors known to reliably explain leverage use, including firm size, revenue, net income, market to book,
dividend, and collateral. We do not report controls for brevity. All variables are as defined in Appendix A. All variables are winsorized at the 1% and 99% levels. All regressions include industry and year
dummies. The t-stats reported in parentheses below the coefficient estimates are based on heteroskedasticity-consistent standard errors that are adjusted for clustering at the firm level. We use a bootstrap
approach to test the difference in the leverage coefficients across different ownership groups and the t-stats are reported in parentheses below the coefficient estimates. ***, **, and * represent statistical
significance at the 1%, 5% and 10% level, respectively.
CRediT authorship contribution statement
Xiaoye Jin: Conceptualization, Methodology, Software, Data curation, Formal analysis, Writing – original draft, Validation, Writing
– review & editing.
Acknowledgements
We would like to thank Peng Lian, Ximeng An and Guoying Fan for their valuable comments. We would like to show our sincere
gratitude to the Editor, the Co-Editor, and two anonymous reviewers for their useful comments and suggestions, which considerably
improved the paper.
Appendix A
Table A1
Variable definition
Leverage measures
ALEV Long-term debt plus debt in current liabilities, scaled by total assets
BLEV Industry adjusted leverage, which is equal to firm debt minus median industry leverage multiplied by firm asset, scaled by total assets
CLEV Long-term debt, scaled by total assets
DLEV Long-term debt plus debt in current liabilities, scaled by long-term debt plus debt in current liabilities and market value of equity
Tax aggression
SHELTER Shelter prediction score Wilson (2009)
SHELTER ¼ 4.30 þ 6.63 BTD-1.72 LEVþ0.66 SIZEþ2.26 ROAþ1.62 FOR_INCOMEþ1.56 R&D
where:
BTD is book income less taxable income scaled by lagged total assets. Book income is pre-tax income. Taxable income is calculated by
subtracting deferred taxes from total income taxes and dividing it by the statutory tax rate.
LEV is long-term debt divided by total assets;
SIZE is the natural logarithm of total assets;
ROA is pre-tax earnings divided by total assets;
FOR_INCOME is pre-tax foreign income divided by lagged total assets;
R&D is the amount of research and development expense divided by lagged total assets
BTD BTD is book income less taxable income scaled by lagged total assets. Book income is pre-tax income. Taxable income is calculated by
subtracting deferred taxes from total income taxes and dividing it by the statutory tax rate.
CuETR Current effective tax rate, which equals total income tax expense minus deferred income tax expense, divided by pre-tax net income
except if total income tax expense and pre-tax income are negative or missing then CuETR is set to missing and if total income tax
expense is positive and pre-tax income is negative then CuETR ¼ 1; CuETR is also limited to between 0 and 1;
ETR Effective tax rate, which equals total income tax expense divided by pre-tax net income except if total income tax expense and pre-tax
income are negative or missing then ETR is set to missing and if total income tax expense is positive and pre-tax income is negative then
ETR ¼ 1; ETR is also limited to between 1 and 1;
Firm-level control
variables
SIZE The natural logarithm of total assets
NI Net income, scaled by total assets
SALES Total revenues, scaled by 10,000,000,000
MB The market-to-book ratio measured as long-term debt plus debt in current liabilities and market value of equity divided by total assets
DIV Dividend dummy ¼ 1 if firm pays dividends
COLLATERAL Net inventories plus net property, plant and equipment, scaled by total assets
EBIT Earnings before interest and taxes, scaled by total assets
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International Review of Economics and Finance 75 (2021) 94–111

Contents lists available at ScienceDirect

International Review of Economics and Finance

Corporate tax aggressiveness and capital structure decisions:

E-mail address: xiaoye.jin.1@ecupl.edu.cn.

government-controlled corporations than privately-controlled corporations.1

3. A theoretical model of capital structure with tax planning

As the second-order condition ∂∂βV2 ¼ 1þ1 υ ðnðn 1Þβ

propose our ﬁrst empirically testable hypothesis:

4.1. Sample selection

4.2. Main variables

4.3. Empirical model

5.1. Descriptive statistics

Variable Mean Standard deviation 25th percentile

ALEV 0.233 0.166 0.089

1 ALEV 0.949*** 0.713*** 0.925*** 0.050*** 0.243*** 0.067***

5.2. Results for baseline regressions – H1

25th percentile 50th percentile 75th percentile

0.089 0.225 0.352

0.054*** 0.361*** 0.417*** 0.075*** 0.344*** 0.143*** 0.378*** 0.289***

ALEV ALEV ALEV ALEV BLEV BLEV BLEV

SHELTER 0.0624*** 0.0622***

5.3. Results for baseline regressions subject to ﬁrm’s proﬁtability – H2

(8) (9) (10) (11) (12) (13) (14) (15) (16)

BLEV CLEV CLEV CLEV CLEV DLEV DLEV DLEV DLEV

ALEV ALEV ALEV ALEV ALEV ALEV ALEV ALEV

SHELTER 0.0610*** 0.0491*** 0.0119***

(-97.97) (-129.88) (-35.69)

BTD 0.0941** 0.0114 (6)–(10) (6)–(14) (10)–(14)

International Review of Economics and Finance 75 (2021) 94–111

Government-controlled corporations Privately-controlled corporations Difference

ALEV ALEV ALEV ALEV ALEV ALEV ALEV ALEV

SHELTER 0.0822*** 0.0391*** 0.0431***

Panel B: Large ﬁrms (upper quartile of total assets)

SHELTER 0.1904*** 0.0523*** 0.1381***

International Review of Economics and Finance 75 (2021) 94–111

ALEV ALEV ALEV ALEV BLEV BLEV BLEV

SHELTER 0.0326*** 0.0325***

5.4. Results for baseline regressions subject to government ownership – H3

5.5. Robustness checks

(8) (9) (10) (11) (12) (13) (14) (15) (16)

BLEV CLEV CLEV CLEV CLEV DLEV DLEV DLEV DLEV

ALEV ALEV ALEV ALEV ALEV ALEV ALEV ALEV

SHELTER 0.0424*** 0.0686*** 0.0262***

(2.52) (0.039) (5.83)

International Review of Economics and Finance 75 (2021) 94–111

ALEV ALEV ALEV ALEV ALEV ALEV ALEV ALEV

SHELTER 0.0457*** 0.0944*** 0.0487***

(0.11) (0.34) (9.74)

International Review of Economics and Finance 75 (2021) 94–111

CRediT authorship contribution statement

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1 ALEV 0.949* 0.713* 0.925* 0.050* 0.243* 0.067*

0.054* 0.361* 0.417* 0.075* 0.344* 0.143* 0.378* 0.289*

SHELTER 0.0624* 0.0622*

SHELTER 0.0610* 0.0491* 0.0119***

SHELTER 0.0822* 0.0391* 0.0431***

SHELTER 0.1904* 0.0523* 0.1381***

SHELTER 0.0326* 0.0325*

SHELTER 0.0424* 0.0686* 0.0262***

SHELTER 0.0457* 0.0944* 0.0487***