Principal SOE customers and corporate tax avoidance: Evidence from the government arrears clearance reform

Abstract

While extent literature suggests that major SOE customers can be beneficial to non-SOEs because of SOEs' stable demand and ability to provide credit endorsement, the absolute dominance of major SOE customers in the supply chain can also have adverse effects on firms, such as forcing the appropriation of firms' commercial credits, which imposes supply-chain costs on firms. Using government arrears clearance reform (ACR) as a quasi-natural experiment, we find that an exogenous reduction in supply chain defaults by major SOE customers alleviates firms' financing constraints, including both internal and external financing, and thus inhibits the incentives for tax avoidance by non-SOEs. This effect is stronger for suppliers that are in financial distress, and we also find that regional taxing intensity plays an important complementary role to ACR. Our findings suggest that it is beneficial for governments to raise tax revenues by requiring major SOE customers to reduce supply chain defaults.