Tax reform and investment efficiency: evidence from China's replacement of business tax with VAT

Yajie Bai and Maoguo Wu

International Journal of Emerging Markets, 2022, vol. 19, issue 3, 775-797

Abstract: Purpose - Extensive macro- and micro-economics research has been conducted on China's tax reform, which replaced business tax with value-added tax (VAT). However, existing studies have not clarified the reform's impact on firm-level investment decisions. Hence, this study explored the effect of replacing business tax with VAT on firms' investment efficiency. Design/methodology/approach - The study used 2010–2018 data from China's A-share listed companies and a difference-in-differences (DID) model to explore the effect of the reform on firm-level investment decisions. Findings - The authors found that China's tax reform has improved investment efficiency in underinvested firms, increased liquidity and decreased the level of reliance on external financing. The tax reform had a greater effect on investment efficiency in firms with lower liquidity and higher external financing reliance. Its effect was also more significant among non-state-owned and small companies. Originality/value - This study fills the aforementioned research gap by exploring the effects of China's tax reform, thus providing a theoretical reference and a basis for policymaking.

Keywords: Tax reform; Investment efficiency; Liquidity; External financing reliance; China (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-08-2021-1295

DOI: 10.1108/IJOEM-08-2021-1295

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