Does Tax Enforcement Affect Cost Stickiness? ——Evidence on the Third Stage of the China Tax Administration Information System

51 Pages Posted: 6 Dec 2021 Last revised: 7 Dec 2021

See all articles by Jing Dai

Jing Dai

Southwestern University of Finance and Economics (SWUFE)

Rong Huang

Department of Accounting, School of Management, Fudan University

Yihuan Mao

Independent

Date Written: December 2, 2021

Abstract

Abstract: In this paper, we examine how tax enforcement affects a firm’s cost behavior by investigating the effect of the third stage of the China Tax Administration Information System (CTAIS-3) on firms’ cost stickiness based on a sample of Chinese A-share listed firms from 2011 to 2016. Anticipating the greater tax enforcement after CTAIS-3, firms will have fewer cash holdings from tax savings and thus have a stronger incentive to decrease cost stickiness, as cost stickiness decreases liquidity. Consistent with this expectation, we find that the implementation of CTAIS-3 is associated with a decline in firms’ cost stickiness. This association is more pronounced for (1) firms with more serious agency problems; (2) firms with greater liquidity problems; and (3) firms with more tax avoidance. In addition, we also find that firms’ decision to reduce cost stickiness after CTAIS-3 results in better future performance. Our results are robust to performing the parallel trend test and placebo test, eliminating the confounding effect of VAT reform, using an alternative firm-level measure of cost stickiness, and controlling for province-by-year fixed effects. Collectively, our findings provide evidence that improvement in information technology reduces information asymmetry and tax enforcement can serve as a corporate governance mechanism to improve the effectiveness of firms’ rational resource management decisions.

Keywords: Tax Enforcement; The Third Stage of the China Tax Administration Information System; Cost Stickiness

Suggested Citation

Dai, Jing and Huang, Rong and Mao, Yihuan, Does Tax Enforcement Affect Cost Stickiness? ——Evidence on the Third Stage of the China Tax Administration Information System (December 2, 2021). Available at SSRN: https://ssrn.com/abstract=3975920 or http://dx.doi.org/10.2139/ssrn.3975920

Jing Dai (Contact Author)

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Rong Huang

Department of Accounting, School of Management, Fudan University ( email )

670 Guoshun Rd.,
Shanghai, Shanghai
China

Yihuan Mao

Independent ( email )

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