VAT rate cut and corporate maturity mismatch: Evidence from China's VAT rate reform

This paper explores the causal link between value-added tax (VAT) and corporate maturity mismatch between investment and financing, using China's VAT rate reform, which lowered VAT rates and was enacted on July 1st, 2017, as a quasi-natural experiment. The results show that the VAT rate reform apparently reduces the degree of corporate maturity mismatch. This is because, on the financing side, the reform improves corporate profitability and thus reduces short-term debts, while on the investment side, the reform has no impact on firm investment. Furthermore, the interaction effects of VAT rate reform and other tax incentives on investment are significantly negative, and short-term debts are riskier than long-term ones, strengthening the above mechanisms. We also find that market competition enhances the reform effects on corporate profitability and corporate maturity mismatch, shedding light on the role of market competition in shaping effect. Finally, we find that the reform effects are primarily significant for non-state-owned enterprises, firms in capital-intensive industries, and firms registered in middle and western China. These findings enrich the understanding of the economic consequences of VAT rate reform and help the government introduce better policies to stimulate investment and control financial risks.