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Impact of an increase in tax deductibility of R&D expenditure on firms' ESG: Evidence from China

Author

Listed:
  • Zeng, Jing
  • Ling, Wen
  • Hua, Min
  • Chan, Kam C.

Abstract

We investigate the impact of tax policy on firms' ESG performance. In 2016, China substantially raised firms' tax deductibility for research and development (R&D) expenditures (i.e., the R&D tax policy). Using a sample of Chinese A-share firms from 2009 to 2022 and a difference-in-differences research design, we find that the R&D tax policy significantly improves firms' ESG performance. These findings are robust to alternative ESG metrics and estimation methods. We also show that the R&D tax policy can lower financial constraints and promote green innovations in firms, which leads to better ESG performance. When a firm is younger or has lower profits, the impact of the R&D tax policy on ESG performance is more salient.

Suggested Citation

  • Zeng, Jing & Ling, Wen & Hua, Min & Chan, Kam C., 2024. "Impact of an increase in tax deductibility of R&D expenditure on firms' ESG: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    • Handle: RePEc:eee:finana:v:96:y:2024:i:pa:s105752192400499x
    DOI: 10.1016/j.irfa.2024.103567
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