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Digital Watchdogs: How smart tax surveillance reshapes corporate cost behavior

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  • Shang, Ke
  • Zhu, Shengliang

Abstract

When corporate revenues decline, costs often refuse to follow—creating the costly puzzle of "sticky" expenses that resist downward adjustment. While digital tax systems reshape business operations globally, their impact on this cost behavior remains unexplored in technology-intensive industries. Exploiting China's "Golden Tax Phase III" staggered rollout as a quasi-natural experiment, we track cost adjustment patterns across electronics manufacturing firms from 2008–2023 using difference-in-differences methodology. Digital tax surveillance reduces cost stickiness substantially, with effects concentrated among low technology-intensive firms and enterprises serving concentrated customer bases. The mechanism operates through dual channels: enhanced cash flow management and improved information transparency that enable more responsive cost adjustments. These findings reveal a novel channel through which regulatory technology affects corporate financial flexibility, demonstrating that digital oversight reduces operational rigidities and enhances firms' ability to adapt cost structures to market conditions.

Suggested Citation

  • Shang, Ke & Zhu, Shengliang, 2025. "Digital Watchdogs: How smart tax surveillance reshapes corporate cost behavior," Finance Research Letters, Elsevier, vol. 86(PD).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pd:s154461232501935x
    DOI: 10.1016/j.frl.2025.108681
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    References listed on IDEAS

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