Corporate income taxes and firm's financing decisions: the case of Vietnamese tax incentives

Abstract

Based on the tax incentives policy enacted by Vietnamese Government in the year 2004, this paper applies Difference in Difference method and compares the debt- equity ratio of treatment and un-treatment (control) companies before and after this policy to determine the impact of corporate taxes’ change on firm’s capital structure. The treatment group is state enterprises and otherwise is control group. The data is collected in the period from 2001 to 2007, therein data related to the period 2001- 2003 is pre-treatment data and those in the period 2004-2007 is post- treatment date. Similar to prior capital’s literature, the empirical results expose that that taxation actually has impact on leverage. The measured impact is approximately -4.1 percentage point, meaning that with the introduction of incentive tax policy, the debt ratio of companies reduces more than 4 percentage point. The evidences also indicate that the large companies absorb the effect of tax change more than Small and Medium Enterprises and also are high significant level.