Can corporate tax shields explain the long-term borrowing behaviour of Chinese listed firms?

This paper tests whether or not the well-documented corporate tax shields explanation of capital structure is applicable to firms listed on the Shanghai Stock Exchange over the period 2002-2007. A Tobit regression model is applied to examine this issue from a debt-capacity perspective. This is applied, first, in relation to all market sectors and then secondly, in relation to the manufacturing sector. It is found that Chinese firms' managers make commercially rational decisions in that they only borrow when the costs of borrowing are significantly lower than the returns generated. However, contrary to theoretical expectations, no evidence is found to indicate that listed firms in China make efficient use of tax shields. The tax shields, equivalent to several hundred billion US dollars per year, are out there, so why don't Chinese firms take advantage of them? This paper tentatively suggests that cultural attitudes towards borrowing and also high levels of government shareholdings can be considered as possible explanations. It is identified however that further research would be required in order to confirm this.