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

Author

Listed:
  • Yajie Bai
  • Maoguo Wu

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.

Suggested Citation

  • Yajie Bai & Maoguo Wu, 2022. "Tax reform and investment efficiency: evidence from China's replacement of business tax with VAT," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 19(3), pages 775-797, August.
    • Handle: RePEc:eme:ijoemp:ijoem-08-2021-1295
    DOI: 10.1108/IJOEM-08-2021-1295
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