Tax Aggressiveness, China's Corporate Tax Reforms, and Market Impact

49 Pages Posted: 26 Aug 2013

See all articles by Guodong Yuan

Guodong Yuan

University of South Australia - School of Commerce

Ron P. McIver

Centre for Applied Financial Studies (CAFS), University of South Australia - School of Commerce

Michael Burrow

University of South Australia - Division of Business and Enterprise - (CAFS), University of South Australia - School of Commerce

Date Written: August 26, 2013

Abstract

Enactment of China’s new Enterprise Income Tax Law was announced on March 16 2007 (with effect from January 1 2008). The Enterprise Income Tax Law potentially increased the tax burden on foreign-invested enterprises (FIEs) and foreign investors as a whole (removing concessions), potentially lowering the tax burden for domestic companies (a fall in the nominal tax rate from 33 per cent to 25 per cent). The announcement of such significant changes to corporate tax arrangements provides a natural ‘experimental platform’ for research on the impact of regulatory change in a transition economy and developing capital market. This study uses the event study method to investigate the relationship between corporate tax aggressiveness and stock price reactions to the announcement of the new Enterprise Income Tax Law. To account for key features of China’s stock markets and corporate behavior, we address the impact of ownership structure, particularly high levels of state and foreign ownership, and differences in the regulatory environment between China’s Shanghai and Shenzhen stock markets. We conclude that the announcement of the Enterprise Income Tax Law had significant market value effects. Additionally, we find variations in market reaction for individual stocks based on tax aggressiveness, ownership, and location of listing.

Keywords: tax aggressiveness, tax reform, ownership concentration, market regulation, China

JEL Classification: G18, H32, P35

Suggested Citation

Yuan, Guodong and McIver, Ronald P. and Burrow, Michael, Tax Aggressiveness, China's Corporate Tax Reforms, and Market Impact (August 26, 2013). Available at SSRN: https://ssrn.com/abstract=2315944 or http://dx.doi.org/10.2139/ssrn.2315944

Guodong Yuan

University of South Australia - School of Commerce ( email )

37-44 North Terrace
Adelaide SA 5000, South Australia 5001
Australia

Ronald P. McIver (Contact Author)

Centre for Applied Financial Studies (CAFS), University of South Australia - School of Commerce ( email )

37-44 North Terrace
GPO Box 2471
Adelaide SA 5000
Australia

Michael Burrow

University of South Australia - Division of Business and Enterprise - (CAFS), University of South Australia - School of Commerce ( email )

37-44 North Terrace
Adelaide SA 5000, South Australia 5001
Australia

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