Tax enforcement and corporate financial irregularities: Evidence from China

• Published in: International review of financial analysis Vol. 88; p. 102697
• Main Authors: Feng, Chen, Ye, Yongwei, Bai, Caiquan
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.07.2023
• Subjects: China; Corporate financial irregularities; Effective supervision; Information disclosure; Tax enforcement; Information disclosure; D22; G30; Corporate financial irregularities; China; Effective supervision; Tax enforcement; H26
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2023.102697

This paper examines whether and how tax enforcement affects corporate financial irregularities in China, utilizing the merger of the State Tax Bureau (STB) and Local Tax Bureaus (LTB) in 2018 as a quasi-natural experiment. Our findings show that stricter tax enforcement significantly reduces corporate financial irregularities, especially for firms with lower tax compliance, poorer internal governance, laxer external supervision, and lower economic status. Furthermore, the mechanism tests demonstrate that stricter tax enforcement forces firms to reduce tax avoidance and tax reporting irregularities. These findings are consistent with the effective supervision channel. Our findings suggest that stricter tax enforcement can improve the quality of corporate information disclosure, and providing useful insights for alleviating information asymmetry and improving information environment in the Chinese capital market. •We study the effects of the merger of the State Tax Bureau and Local Tax Bureaus on corporate financial irregularities.•This merger significantly reduces corporate financial irregularities through the effective supervision channel.•The effect is concentrated in firms with lower tax compliance, poorer internal governance, laxer external supervision, and lower economic status.