Information system and corporate income tax enforcement: Evidence from China

This paper adds the literature by investigating the effect of information system on corporate income tax (CIT) enforcement. We exploit the regional variations generated by the implementation in 2013 of the third stage of the China Tax Administration Information System (CTAIS-3) pilot. The CTAIS-3 is a nationally unified information system that significantly reduces information asymmetry between different tax authorities across regions. We find that the CTAIS-3 pilot significantly reduced firms’ conforming and non-conforming tax avoidance. The enhanced tax enforcement is particularly prominent if a firm is of a smaller size, or is administrated by the State Administration of Taxation, or is a non-state-owned enterprises, or locates in cities with a higher level of local fiscal pressure. Furthermore, we show that the CTAIS-3 improved the CIT enforcement by deterring firms from underreporting accounts receivable, as well as over-reporting accounts payable, inventory and the number of employees. In general, it would be more difficult for firms to hide profits from tax authorities under the CTAIS-3.     

Corporate Governance,Tax Avoidance,and Financial Constraints

We examine how corporate governance affects the relationship between corporate tax avoidance and financial constraints. Conditional on having poor governance, tax avoidance is associated with greater financial constraints and a greater likelihood of financial distress. In firms with strong governance, however, we find that tax avoidance does not have a negative impact on financial constraints. Our results suggest that tax avoidance is a less useful source of financing for constrained firms when they are plagued with potential agency problems and opaque information environments. Stronger governance mechanisms can help firms mitigate the negative consequences of tax avoidance.     

The location of financial sector FDI: Tax and regulation policy

This paper analyzes how corporate taxation and regulatory requirements affect the location of financial sector FDI. We use novel information on new financial services entities established by multinational firms in 83 host countries. We find a negative effect of host country taxes on the probability of choosing a particular host location. We can also confirm a significant influence of the regulatory environment. For example, stricter (equity) capital requirements negatively affect location probabilities. Our empirical approach allows us to provide new insight in how a policy measure of a given country affects other countries by estimating cross-country tax and regulation elasticities.     

A field experiment to explore the effects of detection and penalties communications and framing among Washington State retail firms

The Washington Department of Revenue facilitated a field experiment to explore opportunities to increase Use Tax and Business and Occupation (B&O) Tax compliance by retail industry firms. The experiment tested two enforcement strategies (actually put in place by the State of Washington): communication of noncompliance penalties and announcement of an enhanced detection initiative. Of special interest was whether the compliance initiatives would differentially influence firms in divergent financial positions (increasing versus decreasing revenues). Findings were consistent with the gain/loss framing concept of prospect theory: the elevated enforcement initiatives increased both actual reported Washington State Use taxes and B&O Taxes more for firms with declining revenues (loss frame) than for firms with raising revenues (gain frame). Historically the Use Tax has had a low rate of compliance while the B&O Tax has had a high rate of compliance; thus we tested two very different taxes. The results of the experiment suggest that revenue agencies with limited resources may benefit from focusing greater compliance enhancement efforts on firms with declining revenues as more tax dollars will be generated from these taxpayers. For tax researchers, this experiment demonstrates that gain/loss tax framing can occur in nature by means other than withholding.     

Does confucianism influence corporate earnings management?

This paper investigates the effect of Confucianism on corporate earnings management. Using a sample of Chinese listed firms from 2007 to 2017, we find that corporate earnings management is negatively associated with the popularity of Confucianism. Our findings also reveal that the effect of Confucianism is particularly strong among firms characterized with weaker internal control and external supervision or located in areas with lower level of marketization. Our findings shed important light on how culture improves the quality of financial reporting in emerging markets.     

Spillover effects of VAT Self-enforcement properties: Evidence based on the replacement of business tax with VAT reform

In accordance with the purchasing tax-deduction method and the receipt-based value added tax (VAT) system, the same transaction can be recorded by two firms, which creates self-enforcement properties, thereby restraining tax avoidance. Using the Replacement of Business Tax with VAT reform in China, this paper adopts a difference-in-differences design to investigate the spillover effects of VAT self-enforcement properties on corporate income tax avoidance by manually collating information about suppliers/clients of listed firms. As the listed firms' suppliers/clients switch from paying business tax to paying VAT, there is a striking decline in their corporate income tax avoidance behavior. This effect is pronounced in firms with closer upstream and downstream correlations, higher information complexity and stronger incentives for tax avoidance.     

Tax planning,corporate governance and equity value

Tax planning by firms is a highly significant activity. After audit fees, tax related services are the largest source of fee income for UK accounting firms. When viewed in terms of its impact, tax planning is the major source of the corporation tax gap amongst large firms (HMRC, 2010). Although traditionally tax planning has been viewed as benefiting shareholders via increased after tax earnings, more recently the underlying motivation has been questioned. Desai and Dharmapala (2006) argue that when an information asymmetry exists between managers and shareholders with respect to tax planning, it can facilitate managers acting in their own interests resulting in a negative association between tax planning and firm value. Using a sample of UK quoted firms from 2005 to 2007 and data drawn from International Accounting Standard 12 Income Taxes (IASB, 2010) Effective Tax Rate (ETR) reconciliations, this paper reports such a negative relationship. Further, the relationship is robust to the inclusion of corporate governance measures which could be expected to moderate the potential implications of a tax related shareholder–manager information asymmetry. An innovation of this paper is in using the ETR reconciliations to examine sub-categories of tax planning activities. The paper contributes to the debate of who determines, and benefits from tax planning conducted by firms. Its findings have direct policy relevance for shareholders and tax administrations in monitoring and controlling firms’ tax planning activities.     

IRS Attention

We study how public and private disclosure requirements interact to influence both tax regulator enforcement and firm disclosure. To capture IRS enforcement activities, we introduce a novel data set of IRS acquisition of firms’ public financial disclosures, which we label IRS attention. We examine the implementation of two new disclosure requirements that potentially alter IRS attention: FIN 48, which increased public tax disclosure requirements, and Schedule UTP, which increased private tax disclosure. We find that IRS attention increased following FIN 48 but subsequently decreased following Schedule UTP, consistent with public and private disclosure interacting to influence tax enforcement. We next examine how private tax disclosure requirements under Schedule UTP affected firms’ public disclosure responses. We find that, following Schedule UTP, firms significantly increased the quantity and altered the content of their tax‐related disclosures, consistent with lower tax‐related proprietary costs of disclosure. Our results suggest that changes in SEC disclosure requirements altered the IRS's behavior with regard to public information acquisition, and, relatedly, changes in IRS private disclosure requirements appear to change firms’ public disclosure behavior.     

政府财政激励、税收征管动机与企业盈余管理——以财政"省直管县"改革为自然实验的研究

政府对企业利润享有征税权,事实上是几乎所有企业的最大的中小股东,因此有动机对企业进行严格的税收征管,进而影响公司治理。本文以1998-2006年中国工业企业为样本,以财政“省直管县”改革为自然实验,从企业盈余管理的角度对此进行了考察。研究发现:财政“省直管县”改革能够显著抑制县辖区内企业的盈余管理行为,并且仅对具有征管权限的企业发挥作用;同时,当县级政府财政状况较差和税基较大时,财政“省直管县”对辖区内企业盈余管理行为的抑制作用更强,表明财政“省直管县”改革能够激励县级政府加强税收征管,进而改善辖区内企业盈余质量。更进一步地,本文还发现财政“省直管县”改革能够抑制企业逃税,提升县级政府财政收入。本文的研究不仅丰富了政府行为影响公司治理方面的文献,同时也为财政“省直管县”如何缓解县级政府财政困难提供了微观证据。     

Analyst coverage and corporate tax aggressiveness

We examine the impact of analyst coverage on corporate tax aggressiveness. To address endogeneity concerns, we perform a difference-in-differences analysis using a setting which causes exogenous decreases in analyst coverage. Our tests identify a negative causal effect of analyst coverage on tax aggressiveness, suggesting that higher analyst coverage constrains corporate tax aggressiveness. Further cross-sectional variation tests find that this constraining effect on tax aggressiveness is more pronounced in firms with lower investor recognition and firms with more opaque information environments. Our results are consistent with the notion that higher analyst coverage increases the visibility of aggressive tax planning behavior as well as heightens analysts’ demand for more transparent information, which in turn reduces tax aggressiveness.     

Financial industry lobbying and shareholder litigation outcomes: implications for managers and regulators

We examine the relationship between financial firm corporate lobbying, shareholder-based litigation outcomes, and firm value. We show that political lobbying lowers federal class action securities litigation likelihood for public financial institutions. Secondly, lobbying firms experience a higher likelihood of having litigation dismissed, and the average settlement amount is significantly lower for lobbying institutions. In addition, shortly after a litigation announcement, lobbying firms experience significantly higher cumulative abnormal returns (CARs), compared to non-lobbying firms. Finally, we show that lobbying firms have higher long-run buy-and-hold abnormal stock returns (BHARs) following lobbying activities. Our results link financial institution lobbying activity with improved legal outcomes and relatively higher firm value. While lobbying improves financial firm value, our results also imply that lobbying creates a disadvantage for non-lobbying firms within the industry. Our results provide insights, not only to corporate managers, but to regulators and policymakers interested in the impact of lobbying on the efficacy and objectivity of regulation and enforcement in the financial services industry.     

The dark side of marital leadership: Evidence from China

Using a unique dataset of Chinese private firms, we find that marital leadership is associated with higher propensity for financial fraud. We examine the potential economic mechanisms that lead to this result, finding that weak internal supervision and inefficient decision-making provide crucial linkages between marital leadership and financial fraud. However, well-functioning corporate governance mechanisms reduce the negative effects of marital leadership. Our findings provide important empirical evidence for the effect of family involvement in corporate governance and contribute to the literature on the determinants of financial fraud in listed firms.     

Ownership structure,corporate governance,and fraud: Evidence from China

Our study examines whether ownership structure and boardroom characteristics have an effect on corporate financial fraud in China. The data come from the enforcement actions of the Chinese Securities Regulatory Commission (CSRC). The results from univariate analyses, where we compare fraud and no-fraud firms, show that ownership and board characteristics are important in explaining fraud. However, using a bivariate probit model with partial observability we demonstrate that boardroom characteristics are important, while the type of owner is less relevant. In particular, the proportion of outside directors, the number of board meetings, and the tenure of the chairman are associated with the incidence of fraud. Our findings have implications for the design of appropriate corporate governance systems for listed firms. Moreover, our results provide information that can inform policy debates within the CSRC.     

Accounting regulations,enforcement, and stock price crash risk: Global evidence in the banking industry

This study uses the banking industry as a unique testing setting to examine the impact of accounting and enforcement regulations on stock price crash risk. We find that stocks are less likely to crash in countries with stricter accounting regulations and enforcement standards. More importantly, we provide evidence that the impact of accounting regulations is more significant in countries with stricter enforcement standards, suggesting that enforcement mechanisms and accounting regulations are complementary. We find that the main channels for accounting regulations and enforcement standards to affect stock price crash risk are regulations that strengthen information disclosure and improve the effects of direct supervision and external auditors. Our findings are robust after we include more control variables, employ regional regulatory developments as instrumental variables, conduct change regressions, use alternative measures of enforcement, and estimate in various subsamples. Our study has policy implications for how to design accounting regulations and enforcement mechanisms in a more effective manner.     

Corporate Tax Enforcement Externalities and the Banking Sector

We explore whether corporate tax enforcement can affect bank lending. Specifically, we hypothesize that tax enforcement efforts aimed at small and midsized enterprises (SME) can improve their information environments, which in turn could lead to increased bank commercial lending. Exploiting the regional structure employed by the IRS until 1999, we find that the corporate tax return audit probability for SMEs is associated with greater commercial lending growth for regionally focused banks. We find similar evidence when exploiting the IRS reorganization from a regional to federal system in 2000. Further results show that tax enforcement's impact on SME informational environments is at least partially responsible for this association: The impact of tax auditing on bank lending is stronger for banks facing greater informational disadvantages and in areas where SMEs face greater hold-up problems. Finally, we find that the tax audit rate is positively associated with loan portfolio quality, suggesting that tax enforcement can lead to better loan decisions. Our findings are consistent with the tax authority's mandate having important externalities on bank lending and SME access to capital, suggesting that the benefits to tax enforcement go beyond improving tax collection.     

Financial controller turnover: An early warning sign of deteriorating financial reporting quality

This study examines the relation between financial controller turnover and public firms’ financial reporting quality. Exploiting a special institutional setting in China, where financial controllers along with CEOs and CFOs are required to attest to the accuracy and completeness of firms’ annual reports, we find that: (a) financial controller turnover is negatively associated with financial reporting quality, (b) the negative relation between financial controller turnover and financial reporting quality is more pronounced in non-state-owned enterprises, in firms with weaker corporate governance, and in areas with higher regulatory enforcement intensity, and (c) financial controller turnover is not related to real earnings management. Further analyses show that financial controller turnover is associated with the incidence of subsequent financial report restatements and enforcement actions by the China Securities Regulatory Commission (CSRC). Financial controller turnover also precedes top executive turnover and can be viewed as an early warning sign of deteriorating financial reporting quality. Such information content is incremental to that of top executive turnover. Our analyses also show that firms with financial controller turnover have higher initial stock returns but underperform their counterparts in the long run.     

税费替代:增值税减税、非税收入征管与企业投资

通过减税促进企业投资和提振宏观经济是近年来中国税收制度改革的重要目标,但减税政策的实际效果却存在争议。本文利用2009年增值税转型改革,研究了减税对地方政府税费收入和企业非税负担的影响,从税费替代的角度揭示非税负担变动如何影响企业固定资产投资。研究发现:(1)增值税转型在减税的同时提高了地方政府非税收入并加重了企业非税负担,地方财政收入受增值税转型冲击越大,企业非税负担上升越明显。(2)上述应主要体现在小型、微型和民营企业上,大中型、非民营企业的非税负担未发生明显变化。(3)非税负担上升会显著抑制小型、微型和民营企业的固定资产投资,促使小型微型和民营企业通过持有更多现金和减少流动性负债来应对税费负担不确定性。本文有助于理解减税政策对小型微型和民营企业非税负担的溢出效应及其影响,为通过减税降费促进投资和提振经济提供经验支撑。     

Credit refinancing and corporate tax avoidance

This study examines the disciplining effects of credit markets on firms’ corporate tax avoidance strategies. We show that, during adverse credit market conditions, firms with refinancing needs prefer to limit the after-tax cash flow benefits of tax avoidance to regain access to traditionally risk-averse credit markets. Our results show that firms increase their cash effective tax rate by two percentage points when facing refinancing constraints, and this effect is more pronounced for firms with lower asset redeployability and higher default probability. However, corporate governance mechanisms mitigate the relationship between tax avoidance and credit refinancing. Moreover, we show that firms decrease their tax avoidance strategies while leaving their leverage and debt shield unchanged. Overall, our findings are consistent with the observation that credit markets put pressure on tax-avoiding firms and contribute to the policy debate on disciplining tax avoiders.     

Tax Aggressiveness and Accounting Fraud

There are competing arguments and mixed prior evidence on whether firms that are aggressive in their financial reporting exhibit more or less tax aggressiveness. Our research contributes to resolving this issue by examining the association between aggressive tax reporting and the incidence of alleged accounting fraud. Relying on several proxies for tax aggressiveness to triangulate our evidence, we generally find that tax aggressive U.S. public firms are less likely to commit accounting fraud. However, we caution that our results are sensitive to how tax aggressiveness is measured. More specifically, four (two) of the five (three) proxies for firms’ effective tax rates (book‐tax differences) load positively (negatively) during the 1981–2001 period, implying that fraud firms are less tax aggressiveness. Our inferences persist when we isolate the 1995–2001 period in which accounting impropriety steeply rose and corporate tax compliance steeply fell. Moreover, we continue to find that tax aggressive firms are less apt to fraudulently manipulate their financial statements when we apply factor analysis to identify tax avoidance with a common factor extracted from the underlying proxies and match on propensity scores to ensure that the fraud and nonfraud samples have very similar nontax characteristics.     

Do Firms Hedge in Response to Tax Incentives?

There are two tax incentives for corporations to hedge: to increase debt capacity and interest tax deductions, and to reduce expected tax liability if the tax function is convex. We test whether these incentives affect the extent of corporate hedging with derivatives. Using an explicit measure of tax function convexity, we find no evidence that firms hedge in response to tax convexity. Our analysis does, however, indicate that firms hedge to increase debt capacity, with increased tax benefits averaging 1.1 percent of firm value. Our results also indicate that firms hedge because of expected financial distress costs and firm size.