Based on the unique ownership structure of stated-owned enterprises(SOEs)in China, we examine the influence of expected tax burden on corporate investment decisions. Prior researches indicate that the efficiency of SOEs is lower than non-SOEs, which is proved in stock market as well(Wu, 2012; Yao and Zhang, 2001). There are two explanations for this phenomenon: property right view and policy burden view. The property right view believes that the main reason for the SOEs’ low efficiency is unclear definition of property rights in SOEs(Zhang, 1997). However, the policy burden view instead argues that excessive social responsibility and lack of reasonable market evaluation index lead to the low efficiency of SOEs(Lin et al, 1998). In this paper, we find that SOEs care tax when they make investment decisions, which is consistent with the policy burden view. We also indicate that the main reason for this phenomenon is a unique agency problem caused by the fact that the state is the controller of SOEs, which is also consistent with the property right view. We analyze state ownership structure from a tax perspective, examine the influence of the expected tax burden on corporate investment decisions, and then integrate two explanations mentioned above. In traditional corporate finance theory, both state-owned and non-state-owned controlling shareholders have indiscrimination. Both of them get returns on investment according to the proportion of shares, and the private benefits of control at the same time. However, compared with other types of shareholders, the governments, as the ultimate controllers of SOEs, can not only get equity gains and control rights, but also get tax revenues paid by the companies. Although the governments can also obtain tax benefits from private enterprises, it is difficult for the governments to ensure tax revenues by intervening directly in business decisions of the private enterprises. In contrast, in the SOEs, the governments as the controlling shareholders can directly intervene in the business decisions of SOEs, so as to ensure the implementation of the tax revenues. Unlike the equity gains and the private benefits of control rights, the tax benefits are monopolized by the state. Therefore, the tax benefits could not be incorporated in the market price, which makes the market value underestimate the overall value of the state-owned controlled shareholders to a certain extent. When there is a conflict between tax benefits and returns on equity, the governments are more inclined to get exclusive tax benefits. The private benefits for state-owned holding rights cause the special agency problems between state-owned controlling shareholders and minority shareholders. This paper aims to clarify and analyze how agency problem affects corporate(especially SOEs)investing decisions. This paper takes the sample of listed companies from 2004 to 2013, and compares the relationship between corporate investment and expected tax burden under different ownership structure of listed companies(hereinafter referred to as ‘investment-expected tax burden sensitivity’). We find that, compared with private holding listed companies, investment-expected tax burden sensitivity of SOEs is significantly reduced; when infrastructure investment return rate of local government is higher, that is to say the tax revenue demand of the local governments is bigger, the effect of state-owned shareholders on investment-expected tax burden sensitivity is weaker. The empirical results of this paper support the theoretical hypothesis that private benefits implied by tax is one of the important differences in the property control of listed companies in China. Therefore, tax should not be ignored when comparing and analyzing the different ownership structure and its mechanism of action. From the perspective of governmental exclusive right of taxation, this paper points out that there is a unique agency problem between state-owned controlling shareholders and other shareholders in SOEs. We study the role of ownership structure in corporate financial decision-making, especifically corporate investment decisions, from a perspective of tax benefits under the specific background in China. This paper tries to provide empirical evidence and new research perspective for further investigation into the effect of ownership structure on corporate financial decisions.
/ Journals / Journal of Finance and Economics
Journal of Finance and Economics
LiuYuanchun, Editor-in-Chief
ZhengChunrong, Vice Executive Editor-in-Chief
YaoLan BaoXiaohua HuangJun, Vice Editor-in-Chief
Does Expected Tax Burden Discourage Corporate Investment? Explanation Based on Private Benefits of State-owned Shares
Journal of Finance and Economics Vol. 44, Issue 03, pp. 45 - 55 (2018) DOI:10.16538/j.cnki.jfe.2018.03.004
Summary
References
Summary
[1]Bai J, Lian L S. Why do state-owned enterprises over-invest? Government intervention or managerial entrenchment[J]. Accounting Research, 2014, (2): 41-48. (In Chinese)
[2]Cao Y Y, Wang J Q, Yu L L. An empirical study of corporate social responsibility information disclosure and investment efficiency[J]. Management World, 2012, (12): 183-185. (In Chinese)
[3]Chen D H, Chen X Y, Wan H L. Regulation and non-pecuniary compensation in Chinese SOEs[J]. Economic Research Journal, 2005, (2): 92-101. (In Chinese)
[4]Chen X Y, Jin Q L, Xiao T S, et al. Industry competition, managerial investment, and equity value of growth/put options[J]. China Economic Quarterly, 2013, (4): 305-332. (In Chinese)
[5]Chen Y Y, Luo D L. Local governors’ turnover and firms’ investment[J]. Economic Research Journal, 2012, (S2): 18-30. (In Chinese)
[6]Cheng X S, Tan Y C, Liu J M. The non-financial information, the external financing, and the investment efficiency: A study based on the constraint of external systems[J]. Management World, 2012, (7): 137-150. (In Chinese)
[7]Chen Z M, Xia X P, Yu M G. Government intervention, pyramid structure and investment of local state-owned listed companies[J]. Management World, 2008, (9): 37-47. (In Chinese)
[8]Dou H, Zhang H L, Lu Z F. Business conglomerate supervision of large shareholders and overinvestment[J]. Management World, 2014, (7): 134-143. (In Chinese)
[9]Fu W L, Geng Q. Tax competition, economic agglomeration and investment behavior among regions[J]. China Economic Quarterly, 2011, (4): 1329-1348. (In Chinese)
[10]Fu W L, Zhao Y H. Tax incentive, cash flow and the deviation of enterprise investment structure[J]. Economic Research Journal, 2014, (5): 19-33. (In Chinese)
[11]Hu S Y, Lu Z F. A study on the inhibitory effect of non-executive directors on overinvestment: Empirical evidence from A shares listed companies in China[J]. Accounting Research, 2015, (11): 41-48. (In Chinese)
[12]Huang J, Li Z Q. Government intervention, employment and over-investment[J]. Journal of Financial Research, 2014, (8): 118-130. (In Chinese)
[13]Li W F, Lin B, Song L. The role played by the internal control in companies’ investment: Is it a promotion of efficiency or a repression thereof?[J]. Management World, 2011, (2): 81-99. (In Chinese)
[14]Lin Y F, Li Z Y. Policy burden, moral hazard and soft budget constraint[J]. Economic Research Journal, 2004, (2): 17-27. (In Chinese)
[15]Lin Y F, Li Z. The connotation of the modern enterprise system and the direction of the reform of the state-owned enterprises[J]. Economic Research Journal, 1997, (3): 3-10. (In Chinese)
[16]Liu H L, Wang C F, Wu L S. Decision rights allocation, earnings management and investment efficiency[J]. Economic Research Journal, 2014, (8): 93-106. (In Chinese)
[17]Liu H L, Wu L S, Wang Y P. State-owned enterprises restructuring, board independence, and investment efficiency[J]. Journal of Financial Research, 2012, (9): 127-140. (In Chinese)
[18]Wang Y Z, Song F M. Macroeconomic uncertainty, demand for financing and corporate investment[J]. Economic Research Journal, 2014, (2): 4-17. (In Chinese)
[19]Wei M H, Liu J H. State-owned enterprises’ dividends policies, corporate governance and overinvestment[J]. Management World, 2007, (4): 88-95. (In Chinese)
[20]Wu Y B. The dual efficiency losses in Chinese state-owned enterprises[J]. Economic Research Journal, 2012, (3): 15-27. (In Chinese)
[21]Xin Q Q, Lin B, Wang Y C. Government control, executive compensation and capital investment[J]. Economic Research Journal, 2007, (8): 110-122. (In Chinese)
[22]Xue Y K, Bai Y X. State ownership, redundant employees and company performance[J]. Management World, 2008, (10): 96-105. (In Chinese)
[23]Yao Y, Zhang Q. An analysis of technological efficiency of Chinese industrial firm[J]. Economic Research Journal, 2001, (10): 13-19. (In Chinese)
[24]Zhang H L, Lu Z F. The cash distribution, the corporate governance, and the over-investment: An investigation based on the state of the cash holdings of China’s listed companies and their subsidiaries[J]. Management World, 2012, (3): 141-150. (In Chinese)
[25]Zhong H Y, Ran M S, Wen S X. Government intervention, insider control and company investment[J]. Management World, 2010, (7): 98-108. (In Chinese)
[26]Chen S. Government intervention and investment efficiency: Evidence from China[J]. Journal of Corporate Finance, 2011, 17(2): 259-271.
[27]Desai M A, Dyck A, Zingales L. Theft and taxes[J]. Journal of Financial Economics, 2007, 84(3): 591-623. DOI:10.1016/j.jfineco.2006.05.005
[28]Kornai J. The soft budget constraint[J]. Kyklos, 1986, 39(1): 3-30. DOI:10.1111/kykl.1986.39.issue-1
[29]Kornai J, Maskin E, Roland G. Understanding the soft budget constraint[J]. Journal of Economic Literature, 2003, 41(4): 1095-1136. DOI:10.1257/jel.41.4.1095
[30]Lin J Y, Cai F, Li Z. Competition, policy burdens, and state-owned enterprise reform[J]. The American Economic Review, 1998, 88(2): 422-427.
[31]Rountree B, Weston J, Allayannis G. Do investors value smooth performance?[J]. Journal of Financial Economics, 2008, 90(3): 237-251. DOI:10.1016/j.jfineco.2008.02.002
[32]Zhang W. Decision rights, residual claim and performance: A theory of how the Chinese state enterprise reform works[J]. China Economic Review, 1997, 8(1): 67-82. DOI:10.1016/S1043-951X(97)90013-4
Cite this article
Lin Xu, Su Hongtong, Zhu Kai, et al. Does Expected Tax Burden Discourage Corporate Investment? Explanation Based on Private Benefits of State-owned Shares[J]. Journal of Finance and Economics, 2018, 44(3): 45–55.
Export Citations as:
For
ISSUE COVER
RELATED ARTICLES