Corporate Tax Benefits from Hometown-Connected Politicians

The Accounting Review (forthcoming)

61 Pages Posted: 11 Oct 2018 Last revised: 1 Nov 2023

See all articles by Chunfang Cao

Chunfang Cao

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

Agnes Cheng

Hong Kong Polytechnic University; University of Oklahama

Changyuan Xia

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

Jing Xie

University of Macau, Faculty of Business Administration, Department of Finance and Business Economics

Cheng (Colin) Zeng

Hong Kong Polytechnic University

Date Written: July 22, 2023

Abstract

This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms with hometown connections to incumbent provincial leaders experience favorable tax treatment. This effect is more pronounced when provincial leaders have strong hometown preferences and weaker when these leaders have a strong motivation for promotion, suggesting that social incentives are the primary drivers of the effect of hometown favoritism by politicians on corporate tax benefits. Moreover, this effect is intensified when senior management of firms has personal connections with the provincial leader. The mechanism test reveals that the provincial governments tend to qualify connected firms for preferential tax policies under their jurisdictions. Overall, our results suggest that hometown favoritism by politicians promotes tax benefits for business entities.

Keywords: provincial leaders; hometown favoritism; social identity; tax benefits

JEL Classification: H26; H71; M48

Suggested Citation

Cao, Chunfang and Cao, Chunfang and Cheng, Agnes and Xia, Changyuan and Xie, Jing and Zeng, Cheng, Corporate Tax Benefits from Hometown-Connected Politicians (July 22, 2023). The Accounting Review (forthcoming), Available at SSRN: https://ssrn.com/abstract=3251384 or http://dx.doi.org/10.2139/ssrn.3251384

Chunfang Cao

Southwest University of Finance and Economics ( email )

China

Sun Yat-sen University (SYSU) ( email )

135, Xingang Xi Road
Haizhu District
Guangzhou, Guangdong 510275
China

Agnes Cheng (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

University of Oklahama ( email )

307 West Brooks
Norman, OK 73019-4004
United States

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

Jing Xie

University of Macau, Faculty of Business Administration, Department of Finance and Business Economics ( email )

E22-4064, FBA building
Macau
Macau, 000000
China
+853 88224639 (Phone)

HOME PAGE: http://fba.um.edu.mo/faculty/jingxie/

Cheng Zeng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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