Tax enforcement and investment efficiency–Based on the China's “VAT reform”

Abstract

The impact of tax enforcement on corporate financial accounting behavior has been widely concerned as an external governance mechanism. Based on the background of China's “VAT reform” pilot program in multiple provinces, this paper uses DiD method to test the impact of tax enforcement on corporate investment. We found that the "VAT reform" has suppressed inefficient investment behavior, which is mainly manifested in suppressing the excessive investment behavior of firms. This effect is more significant in regions with insufficient tax collection capacity, economically underdeveloped western regions, and private firms in China. Further research found that tax enforcement mainly improves the investment efficiency of firms by improving the corporate information environment and restraining the level of earnings management; the "Golden Tax III Project" promotes the improvement of tax enforcement technology and further improves the investment efficiency. The research results show that the changes in tax enforcement by China's "VAT reform" can improve the corporate information environment and play a corresponding governance role, thereby enhancing the efficiency of investment and promoting the efficiency of resource allocation.