Does Expected Tax Burden Discourage Corporate Investment? Explanation Based on Private Benefits of State-owned Shares

Abstract

Based on the unique ownership structure of stated-owned enterprises（SOEs）in China, we examine the influence of expected tax burden on corporate investment decisions. Prior researches indicate that the efficiency of SOEs is lower than non-SOEs, which is proved in stock market as well（Wu, 2012; Yao and Zhang, 2001）. There are two explanations for this phenomenon: property right view and policy burden view. The property right view believes that the main reason for the SOEs’ low efficiency is unclear definition of property rights in SOEs（Zhang, 1997）. However, the policy burden view instead argues that excessive social responsibility and lack of reasonable market evaluation index lead to the low efficiency of SOEs（Lin et al, 1998）. In this paper, we find that SOEs care tax when they make investment decisions, which is consistent with the policy burden view. We also indicate that the main reason for this phenomenon is a unique agency problem caused by the fact that the state is the controller of SOEs, which is also consistent with the property right view. We analyze state ownership structure from a tax perspective, examine the influence of the expected tax burden on corporate investment decisions, and then integrate two explanations mentioned above. In traditional corporate finance theory, both state-owned and non-state-owned controlling shareholders have indiscrimination. Both of them get returns on investment according to the proportion of shares, and the private benefits of control at the same time. However, compared with other types of shareholders, the governments, as the ultimate controllers of SOEs, can not only get equity gains and control rights, but also get tax revenues paid by the companies. Although the governments can also obtain tax benefits from private enterprises, it is difficult for the governments to ensure tax revenues by intervening directly in business decisions of the private enterprises. In contrast, in the SOEs, the governments as the controlling shareholders can directly intervene in the business decisions of SOEs, so as to ensure the implementation of the tax revenues. Unlike the equity gains and the private benefits of control rights, the tax benefits are monopolized by the state. Therefore, the tax benefits could not be incorporated in the market price, which makes the market value underestimate the overall value of the state-owned controlled shareholders to a certain extent. When there is a conflict between tax benefits and returns on equity, the governments are more inclined to get exclusive tax benefits. The private benefits for state-owned holding rights cause the special agency problems between state-owned controlling shareholders and minority shareholders. This paper aims to clarify and analyze how agency problem affects corporate（especially SOEs）investing decisions. This paper takes the sample of listed companies from 2004 to 2013, and compares the relationship between corporate investment and expected tax burden under different ownership structure of listed companies（hereinafter referred to as ‘investment-expected tax burden sensitivity’）. We find that, compared with private holding listed companies, investment-expected tax burden sensitivity of SOEs is significantly reduced; when infrastructure investment return rate of local government is higher, that is to say the tax revenue demand of the local governments is bigger, the effect of state-owned shareholders on investment-expected tax burden sensitivity is weaker. The empirical results of this paper support the theoretical hypothesis that private benefits implied by tax is one of the important differences in the property control of listed companies in China. Therefore, tax should not be ignored when comparing and analyzing the different ownership structure and its mechanism of action. From the perspective of governmental exclusive right of taxation, this paper points out that there is a unique agency problem between state-owned controlling shareholders and other shareholders in SOEs. We study the role of ownership structure in corporate financial decision-making, especifically corporate investment decisions, from a perspective of tax benefits under the specific background in China. This paper tries to provide empirical evidence and new research perspective for further investigation into the effect of ownership structure on corporate financial decisions.