Greening tax system, corporate internal control and financial performance

Abstract

ABSTRACT Green tax system is essential for coordinating economic growth and environmental governance, which is of great significance for achieving high-quality development. This study takes the promulgation of ‘Environmental Protection Tax Act’ as an exogenous event to conduct quasi-natural experiments, adopts Difference-In-Differences (DID) to elucidate the mechanism among greening tax system, internal control (IC) and financial performance. The results show that greening tax system enhances heavy polluters’ financial performance and IC effectiveness significantly. Effective IC has a significant mediating effect for the impact of greening tax system on financial performance. Heterogeneity analysis shows that compared with the eastern regions, in central and western regions, greening tax system promotes financial performance more obviously, and the mechanism that greening tax system enhances IC effectiveness, and increases financial performance is more significant. Finally, it is suggested that heavy polluters comply with the ‘Environmental Protection Tax Act’, improve internal governance, to facilitate green tax system be competitive advantages. The regulators promote the long-term mechanism that greening tax system fortifies IC, and increases financial performance. And the regulatory authorities collaborate, and create a favourable environment for implementing green tax policies according to local conditions, to boost higher-quality economic development.