Tax authority enforcement and stock price crash risk: Evidence from China

Abstract

Using the merger of State Tax Bureau and Local Tax Bureaus in China as an exogenous shock, our difference-in-differences estimate shows that an increase in tax authority enforcement significantly decreases stock price crash risk. This relation is robust to a variety of robustness checks, including the parallel-trend assumption, other contemporaneous shocks and industry-level and province-level policies. Furthermore, the active role of tax authority enforcement in lowering stock price crash risk is attenuated when firms have better governance mechanisms and greater tax compliance. Our mechanism tests justify that the reform increases information disclosure quality and reduces the hoarding of bad news.