Tax Incentives and Maturity Mismatch between Investment and Financing: Evidence from China

• Published date: 01 July 2023
• Author: Qianbin Feng,Lexin Zhao,Mingxue Xu
• Date: 01 July 2023
• DOI: http://doi.org/10.1111/cwe.12492

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–36, Vol. 31, No. 4, 2023 1

Tax Incentives and Maturity Mismatch between

Investment and Financing: Evidence from China

Qianbin Feng, Lexin Zhao, Mingxue Xu*

Abstract

This paper examines the effects of China’s accelerated depreciation policy (ADP) on

the maturity mismatch between investment and fi nancing. Using panel data for China’s

A-share nonfinancial listed companies from 2010 to 2019 and a staggered difference-

in-differences approach, we found the following. First, ADP significantly aggravated

the degree of corporate maturity mismatch, and this result was robust across multiple

checks. Second, due to an insufficient long-term loan supply, firms had to finance the

fi xed investments induced by ADP with short-term debts, leading to maturity mismatches.

Third, the positive policy effects were mainly significant for firms with high policy

exposure, high-risk preferences, a high degree of information asymmetry, and fi rms with

weak long-term financing capacity. Finally, maturity mismatch exacerbated corporate

fi nancial risks. Our research fi ndings indicate that passive maturity mismatch is prevalent

among Chinese companies and emphasize the need to address financial repression in

order to mitigate the potential fi nancial risks that may arise from tax incentives.

Keywords: accelerated depreciation, financial repression, maturity mismatch, tax

incentives

JEL codes: D22, G32, G33

I. Introduction

As a result of the global COVID-19 pandemic, the world economy is facing challenges

as serious as those in the “Spanish fl u” pandemic and the Great Depression (Susskind

*Qianbin Feng, PhD Candidate, School of Economics, Zhejiang University, China. Email: qianbinfeng@zju.

edu.cn; Lexin Zhao (corresponding author), PhD Candidate, School of Economics, Institute for Fiscal Big-Data

and Policy of Zhejiang University, Zhejiang University, China. Email: zhaolx@zju.edu.cn; Mingxue Xu, PhD

Candidate, School of Economics, Zhejiang University, China. Email: mxxu@zju.edu.cn. Qianbin Feng and Lexin

Zhao contributed equally to this work and should be considered co-fi rst authors. The authors greatly appreciate

the valuable comments and suggestions of the reviewers. They also thank the sponsor of the Fourth China

Accounting Scholars Forum (2022) and Da Xu from Tsinghua University for their comments and suggestions.

This research was also supported financially by the National Natural Science Foundation of China for

fi nancial support (Nos. 101302-N11502 and 72002175) and the China Scholarship Council (No. 202206320139).

Qianbin Feng et al. / 1–36, Vol. 31, No. 4, 2023

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

2

and Vines, 2020). Governments worldwide have introduced tax policies to tide

enterprises over difficult times and to ensure employment. Accelerated depreciation

policy (ADP), an important investment tax-incentive tool, is supported by policymakers

for its immediate stimulus for investment (Fan and Liu, 2020). The US government’s

Coronavirus Aid, Relief, and Economic Security Act of 2020, for example, augments the

ADP in the US by allowing taxpayers to take bonus depreciation on qualifi ed property

improvements.1 Before the outbreak of COVID-19, ADP was often used around the

world to promote business investment and stimulate the economy (Ohrn, 2019).

China, the world’s largest emerging market economy, has also introduced ADP into

some industries to encourage investment since 2014. Consistent with the empirical

evidence from advanced economies (e.g., Zwick and Mahon, 2017; Ohrn, 2019),

the ADP in China has also had a positive impact on firms’ investment (Fan and

Liu, 2020; Zhao and Fang, 2022a).2 Related to investment, a change in corporate

fi nancing behavior after policy enactment is unavoidable as investments occur if there

are sufficient funds. As documented by Zhao and Fang (2022b), ADP would also

signifi cantly increase fi rms’ asset–liability ratio while promoting investment, indicating

that most firms finance fixed investment by debt financing, leading to a surge in

corporate leverage. Given the increasing corporate leverage and the potential fi nancial

risks it may bring, some experts suggest that the risks associated with tax incentives

should be evaluated carefully. For example, in the last fi nancial crisis, high leverage

was a signifi cant risk factor (Ma et al., 2022).

In addition to the risk of high fi nancial leverage, the risk from maturity mismatch

between financing and investment is another important source of financial risks for

emerging-market firms (Bleakley and Cowan, 2010; Bai, 2022), especially in China.

Based on Wang et al. (2021), across 39 markets from 1998 to 2019, China’s listed

companies had the lowest median in long-term debt over total debt ratio and the highest

value in short-term debt over long-term debt ratio. Figure 1 shows this finding with

data from 2010 to 2019, further indicating that China’s listed companies rely heavily on

short-term debts.

1This insight is provided by Morrison Foerster (2020). Meanwhile, the details of new ADPs in response to

COVID-19 in other countries can be found in Asen (2020).

2Cui et al. (2022) conducted a more recent study on the investment effects of China’s ADP, utilizing

confidential data from corporate tax returns. Their findings differ from previous research as they

discovered that over 80 percent of eligible investments did not utilize the accelerated depreciation

method. This suggests that the ADP may not be as eff ective in promoting fi xed investment as previously

thought.

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Tax Incentives and Maturity Mismatch between Investment and Financing 3

Figure 1. The median of the long-term debt ratio across listed fi rms in 39 markets

(2010–2019)

Source: Authors’ calculation based on the BVD-Osiris database.

Note: We defi ne the long-term debt ratio as the ratio of long-term debts over total debts.

Figure 2 plots the debt and asset structure of China’s nonfi nancial listed companies.

As can be seen, the yearly mean value of short-term debt over the total debt ratio is about

80 percent and is always larger than that of the short-term assets over the total assets ratio.

Taken together, China’s listed companies have built numerous long-term assets, while

these assets are supported by short-term debts rather than long-term ones, leading to a

maturity mismatch problem. It is therefore necessary to explore the policy effects on

maturity mismatch when investigating the fi nancial risk eff ect of ADP in China. However,

there has been a lack of rigorous evaluation on the impact of ADP on maturity mismatch,

even when taking a global perspective. This paper fi lls the gap by providing an in-depth

analysis of the eff ects of ADP in China on the maturity mismatch between fi nancing and

investments.

To be more specific, the Chinese government first introduced an ADP in 2014

for six pilot industries, including the biopharmaceutical manufacturing industry, and

then expanded the policy to more industries in 2015 and 2019, providing us with an

opportunity for empirical identification. Looking at all stages of the ADP and using

panel data of China’s A-share nonfinancial listed companies from 2010 to 2019, we

estimated the policy effects on maturity mismatch with a staggered difference-in-

diff erences (DID) approach.