Investment incentives and the relative demand for skilled labor: Evidence from accelerated depreciation policies in China

This study evaluates the effects of China's 2014 and 2015 accelerated depreciation policies on the relative demand of firms for skilled labor. We develop a simple model to explore how the policies affect the relative demand of firms for skilled labor and illustrate the roles of financing constraints and tax compliance in mediating the policy effects. We then employ a firm-level dataset from China's A-share listed companies and use a quasi-experimental design to examine the model predictions. We find that the policies significantly increase the relative demand of firms for skilled labor. The channels underlying the policy effects are that the policies generate additional cash flow for firms, stimulate investment and, thus, raise the demand of firms for skilled labor with the presence of capital–skill complementarity. We also find that the positive effects of the policies on the relative demand for skilled labor are primarily significant for firms with strong financing constraints and high tax compliance. Moreover, we document the positive effects of the policies on R&D investment, firm value added, productivity, workers' benefits, and corporate social responsibility performance, which further corroborate our main results.     

Fiscal stress and the formation of zombie firms: Evidence from China

We investigate the causality between government fiscal stress and the formation of zombie firms. We use the province-managing-county reform recently initiated in China to exogenously identify the change in financial pressures of local governments. Matching industrial firm data and county economic data from 1999 to 2013, we carry out difference-in-differences estimation and find that the possibility of zombie firms' formation significantly decreases after the reform. Specifically, the suppression effect is more pronounced in counties with low level of initial economic development, more debt stocks, poor financial situations, and high employment pressures. Further, the mechanism analysis shows that the reform improves firms' performance, such as productivity and profitability, through the decline of tax burden, which inhibits the formation of zombie firms. Our study contributes to a profound understanding of the causes of zombie firms in a large transition economy.     

Does an R&D tax credit affect R&D expenditure? The Japanese R&D tax credit reform in 2003

To what extent does a tax credit affect firms’ R&D activity? What are the mechanisms? This paper examines the effect of R&D tax credits on firms’ R&D expenditure by exploiting the variation across firms in the changes in the eligible tax credit rate between 2000 and 2003. Estimating the first-difference equation of the linear R&D model by panel GMM, we find the estimated coefficient of an interaction term between the eligible tax credit rate and the debt-to-asset ratio is positive and significant, indicating that the effect of tax credit is significantly larger for firms with relatively large outstanding debts. Conducting counterfactual experiments, we found that the aggregate R&D expenditure in 2003 would have been lower by 3.0–3.4 percent if there had been no tax credit reform in 2003, where 0.3–0.6 percent is attributable to the effect of financial constraint, and that the aggregate R&D expenditure would have been larger by 3.1–3.9 percent if there had been no cap on the amount of tax credits, where 0.3–0.8 percent is attributable to relaxing the financial constraint of firms with outstanding debts.     

Indirect productivity effects from foreign direct investment and multinational firm heterogeneity

This paper analyzes for a panel of Romanian manufacturing firms whether the quality of foreign firms, measured by their productivity level, affects their potential as a source of indirect productivity effects on domestic firms. We find that only sufficiently productive foreign firms generate positive productivity effects on domestic supplier firms. The most productive foreign firms are the main source of productivity effects. Domestic firms with higher productivity levels also enjoy larger total positive productivity effects. When supplying foreign firms that are less productive than themselves, domestic firms experience zero to negative effects.     

Are export tax rebates patronage for Chinese firms? An analysis of productivity

This paper examines the nexus between export tax rebates and productivity using Chinese firm-level data from 2000 to 2007. The empirical findings indicate that a one percentage point decrease in export tax rebate rates increases the total factor productivity (TFP) of a firm by about 0.1 percentage points. We explore the possible mechanisms that explain this nexus and attribute it to the allocation effect of export tax rebate policy; that is, export tax rebates prevent low-productivity firms from exiting the market and further reallocate resources and economic activities to them. In addition, a decrease in rebate rates significantly encourages the TFP growth of surviving firms and leads to an increase in aggregate TFP. Specifically, throughout 2000–07, the declining rebate rates accounted for 5.23% of the rise in the aggregate TFP, and the between-firm effect was 3.85%, which is much larger than the within effect.     

Innovation and Corporate Tax Planning: The Distinct Effects of Patents and R&D*

Using a large US sample, we find a significant and positive relation between patents and corporate tax planning, and the effect is incremental to the effect of R&D on tax planning. We employ a quasi‐natural experiment based on staggered industry‐level innovation shocks to identify the positive causal effect of patents on corporate tax planning. We also find that patents are not associated with tax planning for domestic firms, but their association with tax planning is concentrated in multinational firms, which have the ability to shift domestic income to low‐tax countries. Moreover, we find that the identified effect mainly exists in the post–check‐the‐box (CTB) rule period when shifting income among affiliates becomes more flexible and convenient. Finally, we use two income‐shifting models and find that patents, rather than R&D, facilitate tax planning through an income‐shifting channel. Overall, our results suggest that R&D and patents facilitate firms' tax planning in distinct ways: R&D facilitates tax planning as intended through tax credits and deductions, whereas patents are used by taxpayers to avoid taxes aggressively through income shifting.     

Higher productivity in importing German manufacturing firms: self-selection, learning from importing, or both?

This paper uses a newly available comprehensive panel data set for manufacturing enterprises from 2001 to 2005 to document the first empirical results on the relationship between imports and productivity for Germany, a leading actor on the world market for goods. Furthermore, for the first time the direction of causality in this relationship is investigated systematically by testing for self-selection of more productive firms into importing, and for productivity-enhancing effects of imports (‘learning-by-importing’). We find a positive link between importing and productivity. From an empirical model with fixed enterprise effects that controls for firm size, industry, and unobservable firm heterogeneity we see that the premia for trading internationally are about the same in West and East Germany. Compared to firms that do not trade at all two-way traders do have the highest premia, followed by firms that only export, while firms that only import have the smallest estimated premia. We find evidence for a positive impact of productivity on importing, pointing to self-selection of more productive enterprises into imports, but no clear evidence for the effect of importing on productivity due to learning-by-importing.     

Do R&D tax incentives work? Firm-level evidence from China

Tax incentives have been used worldwide to encourage firm R&D, but there is little evidence on their effectiveness as a policy tool in developing countries. We use a panel dataset of Chinese listed companies covering 2007 to 2013 to assess the effects of tax incentives on firm R&D expenditures and analyze how institutional conditions shape these effects. Our results show that tax incentives motivate R&D expenditures for our sample firms. A 10% reduction in R&D user costs leads firms to increase R&D expenditures by 3.97% in the short run. We also find considerable effect heterogeneity: Tax incentives significantly stimulate R&D in private firms but have little influence on state-owned enterprises' R&D expenditures. Moreover, the effects of tax incentives are more pronounced for private firms without political connections. Hence, reducing political intervention complements tax incentives' capacity to foster firm R&D in developing countries.     

The complicit role of local government authorities in corporate bribery: Evidence from a tax collection reform in China

In January 2002, China decided to centralize corporate income tax collection, shifting the collection authority from the local tax bureaus (LTBs) to the state tax bureaus (STBs), for all firms established after December 31, 2001. We exploit this exogenous shock to identify a new cause for corporate bribery, namely, the complicit role of local government authorities. We find that firms whose income taxes are still collected by LTBs after the reform bribe more than similar firms whose taxes are collected by STBs. Such effects are more pronounced for firms located in provinces where government intervention is more prevalent and where judicial system is less independent. Moreover, we find that firms whose taxes are collected by LTBs enjoy lower tax burdens and receive greater tax-related subsidies, especially when they bribe more. Overall, our results highlight the reciprocation between local government authorities and firms in determining corporate bribery.     

Does Tax Planning Affect Analysts' Forecast Accuracy?

We investigate whether firms' tax planning affects the accuracy of analysts' forecasts. Tax planning can exacerbate the complexity of firms' operations through strategic choices to exploit tax laws. Because of its effect on firms' operations, tax planning can influence analysts' efforts to understand and forecast earnings. Specifically, if the additional complexity arising from tax planning makes firm attributes less representative of expected earnings, analysts may issue less accurate forecasts. Using auditor‐provided tax services (APTS) as a measure of tax planning, we find that, as firms spend more on tax planning, the accuracy of analysts' forecasts of both earnings per share and tax expense declines. We also document that firms with higher levels of APTS have greater year‐to‐year volatility in, and lower persistence of, effective tax rates and earnings. Our results suggest that increased firm complexity, due to greater tax planning, makes earnings and tax expense more difficult to forecast and that analysts do not properly adjust for these effects. Thus, when deciding to engage in tax planning, firms appear to make trade‐offs between potential tax savings and negative effects on earnings properties and analysts' forecasts.     

Analysts' Interpretation and Investors' Valuation of Tax Carryforwards*

We examine how financial analysts and equity investors incorporate information on deferred taxes from carryforwards into earnings forecasts and share prices. We focus on carryforwards because, in providing this information each period, management must use their private information about the firm's profitability prospects. Thus, accounting measurement of tax carryforwards is another way of providing a management earnings forecast. In analyzing the role of carryforwards in valuation, we distinguish between two conflicting effects. First, deferred taxes from carryforwards represent future tax savings; hence, they should be valued positively as assets. In contrast, the existence of tax carryforwards may signal a higher likelihood of future losses, which would have a negative effect on expected earnings and share prices. We find that analysts consider earnings of firms with carryforwards to be less persistent because of the increased likelihood of future losses. We also find that analysts tend to be less precise and more optimistic (biased) in forecasting earnings of firms with carryforwards. This higher optimism and lower precision are more pronounced just after firms adopt Statement of Financial Accounting Standards (SPAS) 109 and are almost entirely corrected over time. An analysis of investors' valuation indicates a strong positive relation between deferred taxes from carryforwards and share prices, suggesting that these carryforwards are valued as assets. Also, earnings and book values of equity are valued less in firms that have carryforwards than in firms without carryforwards. Finally, the valuation allowance required under SFAS 109 assists equity investors in valuing a firm's earnings and net assets. The combined findings on analysts' interpretation and investors' valuation suggest that analysts fail to fully capture the implication of carryforwards on future earnings within their forecasting horizon.     

The value-added tax reform and labor market outcomes: Firm-level evidence from China

The tax incentives designed to stimulate firm investment may have a large and unexpected impact on labor market outcomes. Using a comprehensive data set on Chinese manufacturing firms during the period 1998–2007 with a difference-in-differences approach, we examine the impact of the value-added tax reform in 2004 on the firm-level labor market outcomes. We find that firms in eligible industries and pilot regions (treated firms) enjoying lower costs of purchasing fixed assets under the reform tended to increase capital investment and reduce employment simultaneously relative to firms that did not have tax incentives (the control firms). Compared with the control firms, the treated firms became more capital intensive but had declines in labor share in value added and average wage. We also find that the employment adjustment is associated with increase in the share of skilled workers in terms of engineers and technicians, but not workers with a college degree or higher.     

Does tax deduction relax financing constraints? Evidence from China's value-added tax reform

Financial constraint is a significant obstacle for firm growth, especially in developing countries where credit is scarce. This paper explores the role of tax policy in relaxing firms' financial constraints by exploiting China's value-added tax (VAT) reform that was initiated in 2004 and completed in 2009. We use a quasi-experimental method and Annual Survey of Industrial Firms (ASIF) data from 2000 to 2009 to estimate the VAT reform's policy effects on financial constraints. We show that the VAT reform significantly improves firms' external financing capacity by decreasing borrowing costs and promoting commercial credit. The findings are robust to alternative specifications but show heterogeneity across ownerships, firm sizes, regions, and between export and non-export firms. Our analysis suggests tax deduction is useful to relax firms' financial constraints.     

Tax Reporting Behavior Under Audit Certainty

This study uses a confidential data set of firms assigned to the Internal Revenue Service's Coordinated Industry Case (CIC) program to examine the effect of audit certainty on firms' tax reporting behavior. We first model the determinants of assignment to the program. Although the ability and incentive to avoid taxes are related to CIC assignment, we find that the IRS assigns firms primarily based on size and complexity. We then test whether audit certainty has a detectable effect on tax payments. Our results show that tax payments do not change when firms enter the CIC program, suggesting the CIC program does not have higher deterrence or enforcement effects relative to the IRS's standard selection and audit process for large corporations not included in the CIC program. However, supplemental analysis suggests that audit certainty does alter managers' expectations regarding future tax payments. Our paper provides new empirical evidence on the strategic game between the taxpayer and the tax authority and has important implications for tax authorities as they consider the costs and benefits of certain audit programs.     

Sorting It Out: Technical Barriers to Trade and Industry Productivity

Trade economists traditionally study the effect of lower variable trade costs. While increasingly important politically, technical barriers to trade (TBTs) have received less attention. Viewing TBTs as fixed regulatory costs related to the entry into export markets, we use a model with heterogeneous firms, trade in differentiated goods, and variable external economies of scale to sort out the rich interactions between TBT reform, input diversity, firm-level productivity, and aggregate productivity. We calibrate the model for 14 industries in order to clarify the theoretical ambiguities. Overall, our results tend to suggest beneficial effects of TBT reform but also reveal interesting sectoral variation.     

Understanding the productivity effect of M&A in Japan: An empirical analysis of the electronics industry from 1989 to 1998

This study examines the effect of mergers and acquisitions (M&A) on productivity. According to the literature, the effect of a merger or acquisition on an acquiring firm's productivity is small. We examine the extent to which self-selection of M&A contributes to the weak M&A effect. Using data on Japanese electronics firms from 1989 to 1998, our empirical analysis shows that without controlling for the self-selection of M&A, M&A have a weak or insignificant effect on total factor productivity (TFP), as suggested in the literature. However, controlling for self-selection reveals a positive and large effect on productivity. We find a negative correlation between M&A decisions and TFP caused by self-selection, which makes the M&A effect appear negligible when it is not controlled for. These results suggest that M&A served as an effective device for improving the productivity of the electronics firms in our sample.     

Economic policy uncertainty,tax quotas and corporate tax burden: Evidence from China

This paper studies how economic policy uncertainty affects corporate tax burden. We show that economic policy uncertainty is positively related to corporate tax burden, and the effect is stronger when the tax quotas are higher. Furthermore, we find that economic policy uncertainty strengthens tax collection by increasing government fiscal pressure, thereby increasing corporate tax burden. Besides, the effects of economic policy uncertainty on corporate tax burden are primarily significant in state-owned enterprises (SOEs), non-high-tech firms, firms from the eastern areas and service industry firms. The evidence illustrates that keeping the transparency and stability of economic policies helps to cut tax burden effectively.     

Does global value chain participation improve firm productivity? A study of selected ASEAN developing countries

This paper examines the impact of local firms’ participation in global value chains (GVCs) on productivity by considering three different patterns of GVC participation. We conducted a DID-PSM estimation involving three countries, Indonesia, the Philippines, and Vietnam, and 17 manufacturing sectors in 2009 and 2015 in a panel framework. We found an endogenous relationship between firm productivity and GVC participation: firms that enter GVCs have high productivity before participating in the GVCs (selection effect), and only Indonesian firms that entered GVCs had high productivity growth after joining GVCs (learning effect). These two effects were only found for firms that both import intermediate goods and export output and not for firms that only either import or export. We also found that indirect exporting does not improve a local firm's productivity. Several recommendations are made to help firms and governments facilitate the participation of firms in GVCs.     

IT,enterprise reform,and productivity in Chinese manufacturing firms

This paper is a first attempt at examining the impact that Information Technology (IT) and enterprise reform have on the productivity of Chinese manufacturing firms by using large-scale firm level datasets from 1995 to 2002. It is found that enterprise reforms captured by the entry and exit of firms have had a positive impact on aggregated productivity growth. In addition, IT plays a relatively important role in the productivity performance of post-reform enterprises, as opposed to enterprises which are not affected by major restructuring in the course of Chinese state-owned enterprise reforms.     

Does the high- and new-technology enterprise program promote innovative performance? Evidence from Chinese firms

This study evaluates the unique high- and new-technology enterprise (HNTE) program implemented in China. The program grants a reduced corporate income tax rate to certificated HNTEs. Based on a sample of Chinese listed firms during 2006–2016, we investigate the impact of HNTE certification on firms' R&D intensity and productivity using a combination of the propensity score matching approach and difference-in-differences estimator. The results confirm the overall effectiveness of the program in promoting innovative performance among Chinese listed firms in terms of both R&D intensity and productivity. Such effects are persistent over the valid certification period. However, the overall effects mask substantial heterogeneity across different types of certification users. Positive effects are mainly driven by repeatedly certificated firms, while no significant effects are found for firms acquiring their HNTE certificate for the first time. By distinguishing one-time and highly qualified certifications, we reveal the potential existence of fraudulent HNTEs. These results imply that the effectiveness of government programs in supporting innovation could be improved through a more thorough policy design and implementation.