Tax authority monitoring and corporate information disclosure quality in China

Abstract

This paper studies the effect of tax enforcement on corporate information disclosure quality by exploiting the enforcement of the “Golden Tax-III” project in China as an exogenous variation in the tax authority monitoring. Our difference-in-differences estimates show that an increase in tax monitoring improves corporate information disclosure quality. This effect is more pronounced in firms with weak external supervision, weak internal governance, and firms located in non-eastern areas, and areas with lower fiscal pressure. Mechanism tests show that tax authority monitoring improves information disclosure quality through tax compliance channels. Our findings document that public enforcement can exert a governance effect on enterprises, especially in developing countries and areas.