Environmental Protection Tax and Corporate Capital Structure

We utilize the environmental protection tax law as an exogenous shock to the tax of environmental protection to investigate the relationship between environmental issues and corporate capital structure. Our findings show that, following the adoption of this tax law, polluting firms are more likely to reduce their leverage. This phenomenon is more pronounced in polluting firms with excess cash, financially constrained firms, or financially distressed firms. Overall, we find that the environmental protection tax reduces corporate leverage by increasing corporate outlays and crowding out debt interest expenses.