The impact of tax enforcement on corporate investment efficiency: evidence from the tax administration information system

Abstract

Information technology is essential in tax enforcement. This study found that stronger tax enforcement after the tax administration information system reform improved corporate investment efficiency by reducing excessive investment expenditures. The effect is more significant under higher local government fiscal pressure, poorer external information environments, weaker external corporate governance, and stronger tax avoidance motivation. The main mechanism is based on the quality of the accounting information. This study enriches the literature on the economic consequences of tax enforcement and adds investment efficiency as an influential factor, which provides implications for international governments to use information technology to strengthen tax enforcement.

Alternative corporate governance: Does tax enforcement improve the performance of mergers and acquisitions in China?

“…We selected A‐share private listed companies in China from 2007 to 2019 as the initial sample because the weak motivation to avoid taxes leads to a relatively weak impact of the tax reform on SOEs (Zhang et al, 2022). We further screen our sample using the following criteria: (i) removing firms in financial industries; (ii) removing firms with abnormal financial conditions, such as ST and PT listed firms; (iii) removing firms with an asset‐liability ratio greater than 1; (iv) removing firms with missing values; (v) keeping the earliest acquisition if there are multiple M&A activities in the same company in the same year; and (vi) removing samples with an M&A transaction amount less than two million.…”

“…We selected A-share private listed companies in China from 2007 to 2019 as the initial sample because the weak motivation to avoid taxes leads to a relatively weak impact of the tax reform on SOEs (Zhang et al, 2022). We further screen our sample using the following criteria: (i) removing firms in financial industries; (ii) removing firms with abnormal financial conditions, such as ST and PT listed firms;…”

“…In addition, CTAIS-3, as a quasi-natural experiment, mitigates the endogeneity issues that were not resolved in Xu et al (2011). Another related paper is Zhang et al (2022), who find that the CTAIS-3 pilot can improve investment efficiency from the perspective of information asymmetry. In contrast, we focus on the governance role of tax enforcement in corporate M&A activities.…”

“…The implementation in 2013 of the third stage of the China Tax Administration Information System (CTAIS‐3) provides an opportunity to identify exogenous changes in tax enforcement. Following Xiao and Shao (2020) and Zhang et al (2022), we test a difference‐in‐differences (DID) model to establish a causal relationship between tax enforcement and M&A performance. Using a sample of 5587 acquisitions initiated by A‐share listed companies in China between 2007 and 2019, we perform a staggered DID model and find that strengthening tax enforcement improves M&A decisions and M&A performance.…”

“…Third, from the perspective of enterprise M&As, we enrich the relevant research on the economic consequences of modern information technology. The literature mainly focuses on how information technology affects enterprise information risk (Masli et al, 2010), audit quality and audit efficiency (Pincus et al, 2017), enterprise tax avoidance (Xiao & Shao, 2020), and investment efficiency (Zhang et al, 2022). Since M&As have a crucial impact on corporate performance and shareholder wealth, we establish a causal relationship between tax enforcement and corporate M&A efficiency, which contributes to the research on the economic outcomes of modern information technology.…”