Does tax uncertainty affect firm innovation speed?

Abstract

Tax reform can promote enterprise innovation at the cost of tax risks and uncertainty. This study explores the impact of tax uncertainty on firm innovation speed using a sample of A-share listed companies from 2008 to 2020. Tax uncertainty retards firm innovation speed mainly by exacerbating corporate information asymmetry and enhancing corporate risk aversion. Lower tax incentives and high innovation novelty weaken this negative effect. Additionally, using tax reform as a quasi-natural experiment, we discover that, during the tax reform, firms affected by the reform experienced a significant increase in tax uncertainty relative to unaffected firms, and such firms showed considerably slower innovation. This study explores the effect of tax uncertainty on firm innovation speed from the perspective of micro-enterprises, emphasizes the identification and proactive management of tax risks by firms themselves, expands research on the economic consequences of tax uncertainty and enriches research on the characteristics of firm innovation. In practice, this study provides insights for governments to focus on the tax uncertainty that firms face during a tax reform period and theoretical support for firms to strengthen tax risk management and further accelerate innovation.