Measurement of Debt Tax Shield Effect and Capital Structure Optimization: Evidence from Chinese Industrial Enterprises

Abstract

Debt financing can create significant tax benefits through the deductibility of interest expense, but excessive reliance on debt may also increase financing costs, liquidity pressure, and overall financial risk. This study examines how debt tax shield effects can be accurately measured and incorporated into capital structure assessment for selected Chinese industrial enterprises. The empirical analysis focuses on SAIC Motor, Midea Group, and CRRC over the 2022 to 2024 period, utilizing publicly disclosed and audited consolidated annual reports. A non-experimental comparative financial approach is adopted to ensure robust evaluations. The statutory debt tax shield is estimated using reported interest expense and the standard corporate income tax rate, while the realized debt tax shield is measured using firm-year effective tax rates. Furthermore, the study systematically compares debt tax shield intensity, leverage, interest-bearing debt ratios, interest coverage, and profitability across firms and over time. The results indicate meaningful differences between statutory and realized tax-shield estimates, alongside substantial heterogeneity in financing structures and debt-servicing capacity among the three enterprises. Crucially, a larger debt tax shield does not necessarily correspond to a more efficient capital structure when interest-bearing debt exposure and financial resilience are considered simultaneously. Consequently, the study proposes firm-specific capital structure optimization directions based on actual financial performance rather than relying on a universal optimal leverage ratio, providing valuable insights for corporate financial management.