How Do Tax Incentives Affect Firm Value? Evidence from China

Abstract

Using a unique Chinese quasi-experiment of corporate tax policy changes in 2014, we examine the effectiveness of introducing accelerated depreciation as a corporate tax incentive on improving firm value. The results show that, relative to control firms, treatment firms that received the accelerated depreciation tax treatment experience significant improvement in total factor productivity (TFP) both immediately and in the long term. We also find that the enhanced firm value is achieved through optimized capital structure and increased level of innovation. We further find that the beneficial effects are more pronounced in state-owned enterprises (SOE), firms with high labor intensity, financial constraints, high growth, and locations in high marketization provinces. Our research uniquely contributes by providing evidence of the microeconomic benefits of corporate tax policies in an emerging market.