The effect of investment tax incentives: evidence from China’s value-added tax reform

We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.     

The effect of chief financial officers’ accounting expertise on corporate tax avoidance: the role of compensation design

Review of Quantitative Finance and Accounting - Accounting expertise is closely related to corporate tax planning, and hence, corporate chief financial officers (CFOs) with accounting expertise may...     

The effects of analysts’ tax expense forecast accuracy on corporate tax avoidance: An international analysis

A spotlight has recently been cast on the role of analysts as monitors of corporate tax planning, but investigations beyond the US are rare. After extension to the international setting, I investigate whether the strength of investor protection impacts the relationship between analysts’ tax expense forecast accuracy and tax avoidance. Using a sample from 24 countries, I find that firms with high analysts’ tax expense forecast accuracy engage in lower levels of tax avoidance than firms with low forecast accuracy; this relationship is greater for firms in countries with weaker investor protection. These findings suggest that the extent of country-level investor protection substitutes for firm-level governance in constraining managerial incentives for tax avoidance.     

Do political connection disruptions increase labor costs in a government-dominated market? Evidence from publicly listed companies in China

This paper investigates whether the disruption of political connections increases labor costs among Chinese listed firms. Using the Communist Party of China's Rule No. 18 as an exogenous shock that forces firms to lose their politically connected independent directors, we find that the disruption of political connections is associated with an increase in labor costs (both in terms of aggregate labor costs per firm and average labor costs per employee) and an increase in employee turnover. Such increases do not lead to labor productivity improvements, and cannot be attributed to changes in corporate policies or the composition of labor forces after Rule No. 18. We also find that firms with higher unemployment risk and skilled labor risk increase their labor costs to a larger extent. Our results are robust to alternative labor cost measures, controlling for potential confounding events, and alternative political connection channels. Our study shows an unintended labor market consequence—increases in labor costs—of political connection disruptions for firms that are adversely affected by such disruptions.     

The impact of idiosyncratic risk on corporate financialisation——Evidence from China

Using the quarterly data of non-financial companies listed on China's A-share market from 2007 to 2019, this paper examines the relationship between the idiosyncratic risk formed based on the secondary market exchanges and the corporate financialization from the perspective of a market feedback effect. The empirical results show that idiosyncratic risk has a significant impact on the allocation of financial assets of non-financial enterprises, which is one of the motivating factors for the financialization of non-financial enterprises. Compared with SOEs, large enterprises and non-manufacturing enterprises; private enterprises, small and medium-sized enterprises, and manufacturing enterprises will allocate more financial assets when idiosyncratic risk increases. Mechanism analysis shows that managers risk aversion and financing constraints increase the impact of idiosyncratic risk on financial asset allocation while strengthening the external monitoring mechanism of institutional investors has the opposite effect. The research findings of this paper help to understand whether secondary financial markets affect the financial investment decisions of real firms in transition economies, and also have implications for how to govern the “transition from real to virtual” of real enterprises in China.     

The impact of large tax settlement favorability on firms’ subsequent tax avoidance

Review of Accounting Studies - I consider how large tax settlements compare to management expectations and then test how the favorability of a resolution (from the firm’s perspective) affects...     

Empirical evidence on the impact of external monitoring on book–tax differences

This study investigates whether institutional ownership levels are associated with levels of and time-series variability in book–tax differences (BTDs). Firm and year fixed-effects regression results suggest that institutional ownership is negatively associated with total, permanent, and temporary BTDs. This effect is driven primarily by permanent BTDs in the pre-SOX era but is consistently present for both permanent and temporary BTDs post-SOX. Further, this negative association is present regardless of firms' classification as “tax planners” and/or “earnings managers.” Finally, the results provide some evidence that stronger monitoring by the board and audit committee (i.e., a smaller and more independent board and a larger audit committee) is associated with lower permanent BTDs but is not consistently related with total or temporary BTDs. Overall, these findings are consistent with higher levels of institutional ownership equating to more effective monitoring of management, resulting in lower BTDs (in terms of both levels and time-series variability).     

Can book-tax differences capture earnings management and tax Management? Empirical evidence from China

This study investigates the relationship between book-tax differences (BTDs) and earnings management, tax management, and their interactions in Chinese-listed companies. Using unique tax-effect BTDs obtained from Chinese B-share-listed firms, we find that firms with strong incentives for earnings and tax management exhibit high levels of abnormal BTDs. This suggests that BTDs can be used to capture both accounting and tax manipulations induced by managerial motivations. Our results indicate that earnings management explains 7.4% of abnormal BTDs, tax management accounts for 27.8% of abnormal BTDs, and their interaction explains 3.2% of abnormal BTDs. Tax-effect BTDs are more powerful than income-effect BTDs in capturing opportunistic reporting at both conceptual and empirical levels.     

A survey of executive compensation contracts in China’s listed companies

We analyze 228 executive compensation contracts voluntarily disclosed by Chinese listed firms and find that central-government-controlled companies disclose more information in executive compensation contracts than local-government-controlled and non-government-controlled companies. Cash-based payments are the main form of executive compensation, whereas equity-based payments are seldom used by Chinese listed companies. On average, there are no significant differences in the value of basic salaries and performance-based compensation in executive compensation contracts. But, compared with their counterparts in non-government-controlled companies, executives in government-controlled companies are given more incentive compensation. Accounting earnings are typically used in executive compensation contracts, with few firms using stock returns to evaluate their executives. However, the use of non-financial measures has increased significantly since 2007.     

Correction to: The impact of large tax settlement favorability on firms’ subsequent tax avoidance

Review of Accounting Studies - The author has to move Table 7 “Sample selection for large tax settlement favorability measure” as Table 1 and mention it at “This procedure,...     

Is social capital associated with corporate innovation? Evidence from publicly listed firms in the U.S

We find that social capital in U.S. counties, as captured by strength of social norms and density of social networks, is positively associated with innovation of firms headquartered in the county, as captured by patents and citations. This relation is robust in fixed-effect regressions, instrumental variable regressions with a Bartik instrument, propensity score matching regressions, and a difference-in-differences design that isolates the effects of over time variations in social capital due to corporate headquarter relocations. Strength of social norms plays a more dominant role than density of social networks in producing these empirical regularities. Cross-sectional evidence indicates the prominence of the contracting channel through which social capital relates to innovation. Additionally, we find that social capital is also positively associated with trademarks and effectiveness of corporate R&D expenditures.     

Agency cost,top executives' overconfidence,and investment-cash flow sensitivity — Evidence from listed companies in China

We examine the effect of agency cost on the relation between top executives' overconfidence and investment-cash flow sensitivity using the data from Chinese listed companies. We find that on average top executives' overconfidence leads to increased investment-cash flow sensitivity. However, this relation holds only for companies with state-owned entities as controlling shareholders. In contrast, the relation is not significant for non-state controlled firms. We construct proxy for agency cost and find that state-controlled companies have significantly greater agency cost than non-state controlled companies. Results on sub-samples sorted by agency cost again show that the positive effect of top executives' overconfidence on investment-cash flow sensitivity holds only for companies that exhibit high agency cost. Our results therefore suggest that agency cost has a significant impact on the relation between top executives' overconfidence and investment-cash flow sensitivity, and the investment distortion due to top executives' overconfidence behavior may be alleviated by reducing agency cost through elevated supervision.     

Do foreign institutional investors drive corporate social responsibility? Evidence from listed firms in China

This paper investigates the effect of qualified foreign institutional investors (QFIIs) on corporate social responsibility (CSR) within the context of listed firms in China. We find that QFIIs offer an incisive channel for improving socially responsible practices. In addition, we find that firms with QFIIs are more likely to comply with the Global Reporting Initiative (GRI) guidelines, and that their sustainability reports tend to be longer. We also find that this positive effect is more pronounced in firms with low initial CSR scores than those with high CSR scores at the time when QFIIs enter the sample. Our empirical evidence further confirms that this positive impact is driven by QFIIs from countries with high social awareness, or QFIIs from geographically distant countries, consistent with their motives, and is linked to the ownership of QFIIs, especially when the QFII is among the top ten of the largest shareholders. Finally, our extended analysis reveals that the increase in CSR performance associated with the presence of QFIIs results in greater firm performance and easier access to finance.     

Does common auditor have an impact on corporate tax avoidance? An investigation from the supply chain perspective

We find that, at both the audit firm and partner level, having a common auditor in the supply chain has a significant positive association with the supplier company's degree of tax avoidance. Companies report a higher level of tax avoidance when they are audited by an industry-expert or a tax expert common auditor, when the common audit partner is economically dependent on the supplier company, when the audit client is in a highly competitive industry, and when the company is subject to a high level of information asymmetry. Moreover, we find potential audit quality issues embedded in common audits in the supply chain.     

The effects of rural–urban migration on corporate innovation: Evidence from a natural experiment in China

We show that the migration of low-skilled, rural workers to urban centers has a negative causal effect on innovation of firms in such urban centers. Our tests exploit the staggered relaxation of city-level household registration system in China, which facilitates rural residents to migrate to cities. We find a significant decrease in innovation for firms headquartered in cities that have adopted such policies relative to firms headquartered in cities that have not. Overall, our results support the view that an abundant supply of low-skilled workers increases the benefit of using existing low-skilled technology and thus reduces firms’ incentive to innovate.     

Empirical investigation of changes in policy uncertainty on stock returns—Evidence from China’s market

This study finds evidence that a rise in economic policy uncertainty (EPU) leads to a decline in stock returns in Chinese market; however, a positive coefficient was observed in the lagged EPU as stock prices rebound. This phenomenon also holds true for a rise in uncertainty innovations in fiscal policy, monetary policy, trade policy and global policy. The evidence leads to conclude that policy uncertainty premiums should be priced into China’s stock prices. An escalation of U.S. policy uncertainty has a significantly harmful effect on Chinese stocks regardless of whether firms are stated own or listed on U.S. market.     

The impact of digital transformation of manufacturing on corporate performance — The mediating effect of business model innovation and the moderating effect of innovation capability

Digital technologies have been rapidly changing traditional industries. In the given context, this study reveals the internal influence mechanism of digital transformation on the corporate performance of the manufacturing industry based on the resource-based view theory. We build a theoretical framework incorporating business model innovation and innovation capability as mediator and moderator variables. To evaluate our hypothesis, we conduct an empirical study on 255 Chinese manufacturing enterprises. We classify digital transformation into exploitative and explorative transformations with the ambidexterity theory. The results show that exploitative and explorative digital transformations significantly and positively impact corporate performance, and business model innovation has a significant mediating effect. Innovation capability positively moderates the impact of exploitative and explorative digital transformations on business model innovation and moderates the mediating effect of business model innovation. This paper provides support for promoting the deep integration of the digital economy and the real economy.     

Empirical analysis of corporate tax reforms: What is the null and where did it come from?

Absent theoretical guidance, empiricists have been forced to rely upon numerical comparative statics from constant tax rate models in formulating testable implications of tradeoff theory in the context of natural experiments. We fill the theoretical void by solving in closed-form a dynamic tradeoff theoretic model in which corporate taxes follow a Markov process with exogenous rate changes. We simulate ideal difference-in-differences estimations, finding that constant tax rate models offer poor guidance regarding testable implications. While constant rate models predict large symmetric responses to rate changes, our model with stochastic tax rates predicts small, asymmetric, and often statistically insignificant responses. Even with very long regimes (one decade), under plausible parameterizations, the true underlying theory—that taxes matter—is incorrectly rejected in about half the simulated natural experiments. Moreover, tax response coefficients are actually smaller in simulated economies with larger tax-induced welfare losses.     

Market misvaluation and corporate innovation: “Catering” or “risk aversion”?—Empirical evidence from China capital market

This paper tests how market misvaluation affects corporate innovation. Unlike the “catering effect” observed in the US, we find that estimated stock overvaluation in China is strongly negatively associated with corporate innovation, conforming to our “risk-aversion” hypothesis. In China, misvaluation affects innovation via finance and management behavior channels. The effect is more significant in non-state-owned corporations than in state-owned corporations. Stock turnover rate and ownership concentration play moderating roles in the effect. The evidence sheds light on the relationship between market risks and corporate innovation in an emerging market.     

The effect of ownership on the prudential behavior of banks – The case of China

Although the relationship between bank ownership and performance is the current focus of much research, this paper investigates the relationship between ownership and the prudential behavior of banks. Using Chinese data, I show that lending by state-owned banks has been less prudent than lending by joint-equity banks, but has improved over time. This is consistent with the hypothesis that accountability to shareholders and depositors gives joint-equity banks a better incentive than state-owned banks to engage in prudent lending, and with the hypothesis that the reform of the banking system has improved the incentive for state-owned banks to behave more prudently in their lending.