Abstract
Financial constraint is a major obstacle for firm growth, especially in developing countries where credit is scarce. This paper explores the role of tax policy in relaxing firms’ financial constraints by exploiting the exogenous shocks from China’s value-added tax (VAT) reform in 2009. We find that VAT reform significantly reduces effective VAT rate, which in turn improves both internal and external financing capacity for firms through the increase in liquidity, cashflow and commercial credit, and through the decrease in borrowing cost as well. The findings are robust to alternative specifications but show heterogeneity across ownerships, firm sizes, regions and between export and non-export firms. Our analysis suggests tax deduction is useful to relax firms’ financial constraints.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
