Corporate Tax Rate Cut on the Cost Behavior of High−tech Companies: The Case of China

Abstract

ABSTRACT This study aims to analyse whether there is a cost stickiness phenomenon in which Chinese companies recognize costs early in the years immediately preceding the tax rate cut (hereinafter TRC) in order to minimize tax burden, and to investigate whether high-tech companies with large TRCs have a higher level than general companies. The analysis results can be summarized as follows: First, there is a phenomenon of cost stickiness in Chinese companies in the year immediately before the TRC. Second, before the 2008 TRC in China, the level of cost stickiness of high-tech companies was not statistically higher than that of general companies. The results of this study provide the following implications that Chinese companies use cost as an incentive to minimize their tax burden. Companies can use appropriate surplus resources as a buffer against environmental changes and actively utilize inefficient resource allocation to promote innovative R&D and improve corporate performance.