How Do Tax Incentives Affect Firm Value? Evidence from China
DOI:
https://doi.org/10.54097/fbem.v11i2.12624Keywords:
Accelerated Depreciation, Total Factor Productivity, Capital Efficiency, Emerging Markets.Abstract
Using a unique Chinese quasi-experiment of corporate tax policy changes in 2014, we examine the effectiveness of introducing accelerated depreciation as a corporate tax incentive on improving firm value. The results show that, relative to control firms, treatment firms that received the accelerated depreciation tax treatment experience significant improvement in total factor productivity (TFP) both immediately and in the long term. We also find that the enhanced firm value is achieved through optimized capital structure and increased level of innovation. We further find that the beneficial effects are more pronounced in state-owned enterprises (SOE), firms with high labor intensity, financial constraints, high growth, and locations in high marketization provinces. Our research uniquely contributes by providing evidence of the microeconomic benefits of corporate tax policies in an emerging market.
Downloads
References
Aboody, D., Lev, B. (2000). Information asymmetry, R&D, and insider gains. Journal of Finance, 55(6), 2747–2766.
Adkins, R., & Paxson, D. (2013). The effect of tax depreciation on the stochastic replacement policy. European Journal of Operational Research, 229(1), 155-164.
Allen, R. C. (2009). The British industrial revolution in global perspective. Cambridge University Press.
Bena, J., & Simintzi, E. (2017). Globalization of work and innovation: Evidence from doing business in china. Discussion paper.
Bernini C., Cerqua A., & Pellegrini G. (2017). Public subsidies, TFP and efficiency: A tale of complex relationships, Research Policy, 46(4): 751−767.
Bertrand, M., & Mullainathan, S. (2003). Enjoying the quiet life? Corporate governance and managerial preferences. Journal of political Economy, 111(5), 1043-1075.
Brandt, L., Van Biesebroeck, J., & Zhang, Y. (2012). Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing. Journal of development economics, 97(2), 339-351.
Cai, F. (2010). Demographic transition, demographic dividend, and Lewis turning point in China. China Economic Journal, 3(2), 107-119.
Cai, F., & Du, Y. (2011). Wage increases, wage convergence, and the Lewis turning point in China. China Economic Review, 22(4), 601-610.
Cai, F., Wang, D., & Qu, Y. (2009). Flying Geese within Borders: How China Sustains Its Labor-intensive Industries? Economic Research Journal, 9, 4-14.
Cai, X., Lu, Y., Wu, M., & Yu, L. (2016). Does environmental regulation drive away inbound foreign direct investment? Evidence from a quasi-natural experiment in China, Journal of Development Economics, 123, 73-85.
Castelnuovo, E., & Lim, G. (2019). What Do We Know About the Macroeconomic Effects of Fiscal Policy? A Brief Survey of the Literature on Fiscal Multipliers. Australian Economic Review, 52(1), 78–93.
Chen, Y. J., Li, P., & Lu, Y. (2018). Career concerns and multitasking local bureaucrats: Evidence of a target-based performance evaluation system in China. Journal of Development Economics, 133, 84-101.
Cummins J. G., Hassett K. A., Hubbard R. G., Hall R. E. & Caballero R. J. (1994). A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments，Brookings Papers on Economic Activity, 2: 1-74.
Elvin, M. (1972). The High-level Equilibrium Trap: The Cause of the Decline of Invention in the Traditional Chinese Textile Industries. Stanford Univ. Press.
Everaert G., Heylen F., & Schoonackers R. (2015). Fiscal policy and TFP in the OECD: Measuring direct and indirect effects, Empirical Economics, 49(2): 605−640.
Fan, G., Wang X., & Ma G. (2011). Contribution of Marketization to China’s Economic Growt. Economic Research Journal, 9(002).
Fang, L. H., Lerner J., & Wu, C. (2017). Intellectual property rights protection, ownership, and innovation: Evidence from China. The Review of Financial Studies, 30(7), 2446-2477.
Gao, H., Zhang, H., & Zhang, J. (2018). Employee turnover likelihood and earnings management: evidence from the inevitable disclosure doctrine. Review of Accounting Studies, 23(4): 1424-1470.
Giannetti, M., Liao, G., & Yu, X. (2015). The Brain Gain of Corporate Boards: Evidence from China, Journal of Finance, 70(4), 1629-1682.
Godfrey, J. M., & Hamilton, J. (2005). The impact of R&D intensity on demand for specialist auditor services. Contemporary Accounting Research, 22(1), 55–93.
Gu, Z., Tang S., & Wu, D. (2019). The Political Economy of Labor-Employment Decisions: Evidence from China, Management Science, forthcoming.
Hall, B. H., Jaffe, A., & Trajtenberg, M. (2005). Market value and patent citations. RAND Journal of economics, 16-38.
Hall, B. H., Jaffe, A. B., & Trajtenberg, M. (2001). The NBER patent citation data file: Lessons, insights and methodological tools (No. w8498). National Bureau of Economic Research.
Hicks, J. (1963). The theory of wages. Springer.
Hopenhayn, H. A. (2011). Firm microstructure and aggregate productivity. Journal of Money, Credit and Banking, 43, 111-145.
House C., & Shapiro M. D. (2008) Temporary investment tax incentives: Theory with evidence from bonus depreciation, American Economic Review, 98(3): 737−768.
Hussain, S. M. (2015). The contractionary effects of tax shocks on productivity: An empirical and theoretical analysis. Journal of Macroeconomics, 43, 93-107.
Hsieh, C.-T., & Klenow, P.J. (2009). Misallocation and manufacturing TFP in China and India, Quarterly Journal of Economics, 124(4), 1403-1448.
Irmen, A. (2017). Capital- and Labor-Saving Technical Change in An Aging Economy. International Economic Review, 58(1), 261-285.
Koowattanatianchai, N., & Charles, M. B. (2015). A mixed methods approach to studying asset replacement decisions. International Journal of Business Innovation and Research, 9(5), 544-567.
Krishnan, K., D. K. Nandy, & M. Puri. (2015). Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment. Review of Financial Studies, 28(6): 1768-1809.
Matsumoto, D. A. (2002). Management’s incentives to avoid negative earnings surprises. The Accounting Review, 77(3), 483–514.
Mountford, A., & Uhlig, H. (2009).What are the Effects of Fiscal Policy Shocks? Journal of Applied Econometrics, 24(6):960-992.
Nikkei Asian Review. (2019, January 6). Labor shortage drives more bankruptcies in Japan. Retrieved on September 14, 2019, from https://asia.nikkei.com/Business/Business-trends/Labor-shortage-drives-more-bankruptcies-in-Japan.
Opp, M. M., Parlour, C. A., & Walden, J. (2014). Markup Cycles, Dynamic Misallocation, and Amplification, Journal of Economic Theory, 154: 126-161.
State Taxation Administration. (2007, December 6). Implementation Regulation of the Enterprise Income Tax Law of the People's Republic. Retrieved on September 9, 2019, from http://www.chinatax.gov.cn/n810341/n810765/n812176/n812748/c1193046/content.html (in Chinese).
State Taxation Administration. (2014, October 20). Notice on Improving the Enterprise Income Tax Policy for Accelerated Depreciation of Fixed Assets. Retrieved on September 9, 2019, from http://www.chinatax.gov.cn/n810341/n810755/c1260992/content.html (in Chinese).
The New York Times. (2015, September 1). Stocks Dive As Worries About Asia Reverberate. Retrieved on July 25, 2019, from https://www.nytimes.com/2015/09/02/business/dealbook/daily-stock-market-activity.html.
The New York Times. (2019, January 21). China’s Looming Crisis: A Shrinking Population. Retrieved on July 24, 2019, from https://www.nytimes.com/interactive/2019/01/17/world/asia/china-population-crisis.html?_ga=2.248934087.1968373327.1564016735-1353886149.1564016735.
Wielhouwer J. L., & Wiersma E. (2014). Investment decisions and depreciation choices under a discretionary tax depreciation rule, European Accounting Review, 26(3): 1−25.
Wei, S. J., Xie, Z., & Zhang, X. (2017). From" Made in China" to" Innovated in China": Necessity, prospect, and challenges. Journal of Economic Perspectives, 31(1), 49-70.
Whited, T. M., & Wu, G. (2006). Financial constraints risk. The Review of Financial Studies, 19(2), 531-559.
Wu, Y. (2005). The effects of state R&D tax credits in stimulating private R&D expenditure: A cross‐state empirical analysis. Journal of Policy Analysis and Management, 24(4), 785-802.
Yu, F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88(2), 245–271.
Zwick, E., & Mahon, J. (2017). Tax policy and heterogeneous investment behavior. American Economic Review, 107(1), 217-48.
