Corporate Tax Benefits from Hometown-Connected Politicians

56 Pages Posted: 11 Oct 2018 Last revised: 23 Oct 2019

See all articles by Chunfang Cao

Chunfang Cao

Sun Yat-Sen University (SYSU); Southwest University of Finance and Economics

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Changyuan Xia

Southwestern University of Finance and Economics (SWUFE) - School of Insurance

Cheng Zeng

University of Manchester

Date Written: October 22, 2019

Abstract

This paper investigates the impact of the geographic coincidence of firms and political leaders on corporate tax benefits. Taking advantage of a unique tax disclosure rule in China, which allows us to identify firm-specific tax benefits, we find that firms enjoy more favorable tax treatments if they have a hometown connection with the incumbent provincial leader. This effect is not driven by quid pro quo exchanges or the informational advantages of the political leader, but is attenuated when the leader has stronger promotion incentives. Further analysis suggests that the stock market reacts negatively to the regulation that bans hometown associations between businessmen and government officials. Moreover, we show heterogeneities in the effect of hometown connections on corporate tax benefits in terms of the cost-benefit trade-off. Overall, our study sheds light on how the social identities of politicians engender tax benefits for business entities.

Keywords: Political Leaders; Hometown; Social Identity; Tax Benefits

JEL Classification: H26; H71; M48

Suggested Citation

Cao, Chunfang and Cheng, C.S. Agnes and Xia, Changyuan and Zeng, Cheng, Corporate Tax Benefits from Hometown-Connected Politicians (October 22, 2019). Available at SSRN: https://ssrn.com/abstract=3251384 or http://dx.doi.org/10.2139/ssrn.3251384

Chunfang Cao

Sun Yat-Sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Southwest University of Finance and Economics ( email )

China

C.S. Agnes Cheng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Changyuan Xia

Southwestern University of Finance and Economics (SWUFE) - School of Insurance ( email )

Liulin Campus 555, Liutai Avenue, W
Gezhi Building 227,Liulin Campus 555
成都市, SC Sichuan 611130
China

Cheng Zeng

University of Manchester ( email )

Oxford Road
Manchester, M13 9SS
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
67
Abstract Views
882
rank
344,668
PlumX Metrics