Tax incentives and the financialization of the real sector: Evidence from the accelerated depreciation policy in China

Abstract

Firms in the real sector are experiencing the process of financialization. Using data from China's listed firms, this study exploits the accelerated depreciation policy as a natural experiment, investigating the effect of tax incentives on corporate financialization. We find that the accelerated depreciation policy significantly reduces corporate financialization. We test two possible motives of precautionary saving and higher-return seeking. Our evidence supports that the latter channel is active – the accelerated depreciation policy decreases the cost of investment in fixed assets, making financial investment less attractive.