Too far east is west: tax risk, tax reform and investment timing

Abstract

Purpose

Tax risk refers to the uncertainty of future corporate taxation. Tax reform is a key issue in major current tax system adjustments that seriously affect a firm's tax risk. In response to changes in the economic environment, many countries are actively executing tax reform. Long-term reforms implemented for a smooth transition may instead increase corporate risk. This study examines the relationship among tax risk, tax reform and investment timing.

Design/methodology/approach

Selecting the Shanghai Stock Exchange and Shenzhen Stock Exchange A-share listed companies' panel data from 2008 to 2017, the paper used survival analysis and the propensity score matching-difference in difference models.

Findings

The results show that a higher corporate tax risk results in more deferred investments, which are further examined using the latest Chinese value-added tax reform as a natural experiment.

Originality/value

The conclusion serves as an important reference for governments to balance reform time and to support enterprises in effectively identifying and managing tax risk under tax reform.

Citation

Chen, W. (2021), "Too far east is west: tax risk, tax reform and investment timing", International Journal of Managerial Finance, Vol. 17 No. 2, pp. 303-326. https://doi.org/10.1108/IJMF-03-2020-0132