Government Land Finance and Corporate Corruption Spending in China

Abstract

This study examines the relationship between government land finance and corporate bribery payments and tax payments in China. Anecdotal evidence and previous research (e.g., Chen 2017; Liu 2018; Chen, Tan, Wang, and Zeng, 2022) suggest that the Chinese government's stricter tax and non-tax enforcement on local firms is a response to the deterioration of land finance. We propose that firms resort to unethical corruption expenses as a means to mitigate expropriation by the government in the face of declining land finance. We follow prior literatures (e.g., Cai, Fang, and Xu 2011; Xu, Zhou, and Du 2018; Kim, Lee, Tang, and Zhang 2022) to measure corporate corruption expenditures as abnormal entertainment and travel costs of Chinese firms. Our findings reveal that a decrease in local government land transfer revenue is associated with an increase in firm corruption expenditures within these jurisdictions. This effect is more pronounced for firms headquartered in cities with higher levels of corruption and governments that exhibit greater market intervention and are governed by officials seeking promotion. Further evidence shows that firms that allocate more resources to corruption are less likely to face higher tax burdens or subsidy reductions when local governments experience a decline in land transfer revenue. Overall, our study provides new insights into the relationship between government land finance and corporate unethical actions and tax avoidance activities in China.

Keywords: government land finance; government expropriation; corporate corruption spending; corporate tax avoidance

JEL Classification: D21; D73; H26; H3; H71