How Do Tax Incentives Lead to Investment Shifting? Evidence from China

Tingting Ni, Xinyue Wang and Yuetang Wang

Emerging Markets Finance and Trade, 2022, vol. 58, issue 7, 2079-2092

Abstract: Corporate VAT planning, though difficult to observe, has become more prominent. By considering the Chinese VAT transition as an external policy shock, this article adopts a difference-in-difference model to study this issue for the period 2006–2009. The results indicate that companies, in particular companies with high financing constraints and low type I agency costs, had investment-shifting behavior, so as to reduce the tax burden. Compared with agency costs, financing constraints have a greater influence on firms’ shifting. Further, the market has a positive attitude toward shifting of high financing constraints companies, but a negative attitude toward that of high agency costs companies.

Date: 2022
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DOI: 10.1080/1540496X.2021.1956900

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