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Does access to credit reduce SMEs’ tax avoidance? Evidence from a regression discontinuity design

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  • Xiaowei Kong

    (Dongguan University of Technology)

  • Deng-Kui Si

    (Qingdao University)

  • Haiyang Li

    (Zhongnan University of Economics and Law)

  • Dongmin Kong

    (Huazhong University of Science and Technology)

Abstract

This study investigates the effect of targeted reserve requirement ratio cuts (TRRRCs) on tax avoidance among small and micro enterprises (SMEs) with operating revenues below specific cutoffs in China. Using a regression discontinuity design, we causally show that, by increasing loan availability, TRRRCs significantly alleviate the financial constraints and cash dependence of SMEs and consequently reduce tax avoidance. This is especially the case among firms with lower market power and higher entertainment and travel costs. Our findings provide evidence for the real effect of TRRRCs on corporate tax avoidance and show the inclusive effect of TRRRCs on SMEs. In doing so, we indirectly reveal a rent-seeking channel underlying bank lending, thus offering clear policy implications for regulators.

Suggested Citation

  • Xiaowei Kong & Deng-Kui Si & Haiyang Li & Dongmin Kong, 2021. "Does access to credit reduce SMEs’ tax avoidance? Evidence from a regression discontinuity design," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-23, December.
    • Handle: RePEc:spr:fininn:v:7:y:2021:i:1:d:10.1186_s40854-021-00235-3
    DOI: 10.1186/s40854-021-00235-3
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    More about this item

    Keywords

    Access to finance; Small and micro enterprises (SMEs); Tax avoidance; Targeted reserve requirement ratio cuts (TRRRCs);
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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