Corporate Investment and Tax Disincentive: Evidence from China

This study investigates how taxes influence corporate investment behavior. Based on a census of Chinese industrial enterprises, we utilize a tax-adjusted q model to examine the effects of taxes on corporate investment in fixed assets in China. Results show that the effective tax rate has a relatively small but significantly negative impact on Chinese firms’ investment in fixed assets. We extend the tax-adjusted q model to control for the lagged investment effect and peer effect of investment. Models with these effects do better at explaining the impact of taxes on firms’ investment. The lagged investment models present smaller but significant tax disincentive. Firms compete for investment with other firms both in the same region and in the same industry through peer effect. In addition, the tax disincentive differs among state owned enterprises, private enterprises, and other enterprises in China.