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Investment incentives and leverage: Evidence from China’s accelerated depreciation policy

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  • Lexin Zhao
  • Hongsheng Fang

Abstract

Using a difference‐in‐differences (DID) approach, this paper evaluates the effects of China's accelerated depreciation policy on corporate leverage. We find that the policy significantly increases corporate total leverage, which is mainly driven by the increase in long‐term leverage. Moreover, raising investment in fixed assets serves as the primary mediating channel through which the policy affects long‐term leverage and thus, total leverage. Finally, the positive effects of the policy on leverage are primarily significant in firms that are not close to tax exhaustion, and firms that invest in long‐lived assets.

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  • Lexin Zhao & Hongsheng Fang, 2022. "Investment incentives and leverage: Evidence from China’s accelerated depreciation policy," The World Economy, Wiley Blackwell, vol. 45(11), pages 3625-3649, November.
    • Handle: RePEc:bla:worlde:v:45:y:2022:i:11:p:3625-3649
    DOI: 10.1111/twec.13273
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