Tax Aggressiveness, China's Corporate Tax Reforms, and Market Impact
49 Pages Posted: 26 Aug 2013
Date Written: August 26, 2013
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
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