Impact of corporate income tax on the capital structure of Canadian listed companies

Abstract

This study investigates the impact of capital structure on the profitability of non-financial listed companies in China for the period 2010 to 2014. The entire sample data includes 571 companies from 12 different industries. The study builds a panel-data model for the data, uses both linear model and quadratic model to test the relationship between capital structure and profitability. Through correlation and regression analysis, the study finds that the relationship between total debt-asset ratio and profitability is negative, and relationship between long-term debt to total debt ratio and profitability is positive. Moreover, the quadratic model indicates that the evidence of optimal capital structure exists in the Chinese capital market. The conclusion is a company with higher tax rate, basically the company will obtain lower cash flow from operating activities. However, the model indicates that the short term liability will decrease when a company faced higher marginal tax rate, the long term debt has no proportional change.