Corporate Tax Benefits from Hometown-Connected Politicians

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