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
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
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