The Impact of Tax Rebates on Firm Value: Evidence from High-Tech Certificates Announcements in China
43 Pages Posted: 26 Apr 2015
Date Written: December 1, 2013
High technology and innovation has become a central part of China’s long-term growth strategy. The 2007 enterprise tax reform (EIT) significantly reduced the statutory tax rate of high-tech firms from 33 percent to at most 15 percent, and possibly less, guaranteed for at least 3 years. Before the reform, tax benefits to high-tech firms were only provided at the local level, were not available nationwide on a uniform basis, and subject to stringent financial criteria. In spite of the reform high-tech certificates have been criticized for being awarded to companies that were already enjoying tax benefits, in which case the reform only marginally changed their effective corporate tax rate. Using an event study methodology to study the stock market reaction to high-tech certificates announcements in China, we find that high high-tech certificate announcements generated significant positive abnormal returns. The impact is significantly larger for private firms than government-owned firm, because private firms were less likely to benefit from other pre-event tax benefits, as well as small and growth firms, and non-high tech manufacturing industries. Although this paper focuses on a specific provision of EIT reform, it is one of the first empirical evaluations of the reform and the first study that investigates whether the reform in high-tech taxation was effective at reaching non government-owned firms.
Keywords: event study, high-tech, China, tax reform, enterprise income tax, stock market
JEL Classification: G14, G15, G30, H25, H87
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