Transportation Infrastructure Development and Tax Avoidance: Evidence From a Quasi-Natural Experiment

Abstract

Utilizing the launch of high-speed railway (HSR) service in China as a quasi-natural experiment, we identify an important social benefit of the development of transportation infrastructure: the reduction of firms’ value-destroying tax avoidance. Specifically, we find that after the opening of HSR lines to the cities where firms are located, firms have lower information asymmetry and engage in less tax avoidance, which leads to enhanced firm value. In further analysis, we find that this relation is more prominent for firms whose managers have a high propensity to extract rents through aggressive tax strategies. Our results indicate that the launch of HSR service reduces the cost of monitoring, thereby constraining insiders’ ability to extract private benefits under the guise of tax avoidance. To rule out alternative explanations, we conduct several additional analyses.

Keywords: high-speed railway, geographic proximity, tax avoidance; agency problem

JEL Classification: G34, H26, H54, O18