Tax enforcement and corporate overinvestment: Evidence from China’s STB-LTB merger

Yan Zhang and Fang Wu

Economic Analysis and Policy, 2025, vol. 87, issue C, 1212-1231

Abstract: This paper investigates whether and how tax enforcement affects corporate overinvestment in China by exploiting the merger of the State Tax Bureau (STB) and Local Tax Bureau (LTB) as a quasi-natural experiment. The results show that tougher tax enforcement helps inhibit corporate overinvestment. The effect is particularly pronounced in three distinct contexts: (1) non-SOEs, (2) regions with greater government market intervention, and (3) firms with weaker corporate governance structures. Furthermore, the mechanism tests suggest that breaking implicit contracts and reducing tax benefits are two possible channels through which the merger affects corporate overinvestment. Additionally, several alternative explanations are ruled out. Overall, our findings suggest that tax enforcement significantly restricts corporate overinvestment, which provides useful insights for improving corporate investment efficiency.

Keywords: Tax enforcement; STB–LTB merger; Corporate overinvestment (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:87:y:2025:i:c:p:1212-1231

DOI: 10.1016/j.eap.2025.07.008

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