Investor Tax Breaks and Financing for Start-Ups: Evidence from China
76 Pages Posted: 3 Jul 2024
Date Written: 2024
Abstract
We examine how investor-level tax incentives affect financing for start-ups using the introduction of a generous tax deduction for qualified angel and VC investment in China as a quasi-natural experiment. We find that the tax incentive increases funding for eligible start-ups, with stronger responses from larger and more experienced investors. The tax incentive leads to substitution between eligible and non-eligible investments. There is no evidence that the tax incentive lowers investment quality. We further show that the investor-level tax incentive encourages firm entry into affected industries, especially in cities more exposed to venture capital funds.
Keywords: venture capital, angel investment, tax incentives, entrepreneurship
JEL Classification: G240, G320, H250, L260
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