Tax cuts and firms’ R&D capital efficiency

• Published in: Finance research letters Vol. 49; p. 103029
• Main Authors: Tu, Yongmei, Liu, Tianbao
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.10.2022
• Subjects: Business tax reform; China; Difference-in-differences; R&D capital efficiency; Business tax reform; R&D capital efficiency; Difference-in-differences; China
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2022.103029

•This paper explores the causality between tax cuts and firms’ R&D capital efficiency using China's Business Tax reform as an exogenous shock.•This paper documents that the reform significantly improves firms’ R&D capital efficiency.•We contend that the increased cashflows after the reform, the subsequent R&D investments, and the hiring of R&D personnel are the plausible mechanisms at work.•The result differs depending on financial constraint, technology intensity, competition level and marketization degree. This paper explores the causality between tax cuts and firms’ R&D capital efficiency using China's Business Tax reform as an exogenous shock. Our difference-in-differences (DID) estimation documents that the reform significantly improves firms’ R&D capital efficiency, and the result remains robust under a series of tests. We contend that the increased cashflows after the reform, the subsequent R&D investments, and the hiring of R&D personnel are the plausible mechanisms at work. The result is more pronounced for firms bounded by stringent financial constraint, firms with lower technology intensity, firms undergoing fiercer competition and firms facing higher level of marketization.