On the tax bias against investments in fixed assets: Empirical evidence from China

Abstract

AbstractChina's new Corporate Income Tax Law was passed in March 2007 and took effect on 1 January 2008. We take advantage of this tax law change and use a difference‐in‐differences approach to empirically estimate the impact of taxation on asset structure. Employing the Chinese Industrial Enterprises Database from 2002 to 2008 to implement the analysis, we find evidence suggesting the presence of tax bias against investments in fixed assets. We address two potential concerns about our analysis and argue that our conclusion is not China‐specific; it is a general lesson for modern finance theory that is portable to developed countries.