“Tax reduction” and the financialization of real enterprises: Evidence from China’s “VAT reform”

Structural tax reduction represents a crucial measure supporting the advancement of real enterprises, with discernible policy spill-over effects on corporate asset allocation. This paper empirically examines the impact of tax reduction on the financialization of real enterprises, utilizing data from Chinese listed companies spanning the years 2009 to 2016 and anchored in the policy shock induced by the “VAT Reform”. The findings suggest that the tax reduction effect resulting from the “VAT Reform” significantly suppresses the financialization of real enterprises, with this policy effect gradually diminishing from the third year onward. Further heterogeneity analysis reveals that tax reduction exerts a more pronounced impact in curbing the intensity of corporate financialization, particularly in private enterprises and companies facing higher financial constraints. Subdividing the term structure of financial assets indicates a significant reduction in the allocation of long-term financial assets for both state-owned and private enterprises. Remarkably, state-owned enterprises show no significant change in the allocation of short-term financial assets, while private enterprises witness a substantial increase in short-term financial asset allocation. Further tests validate the conclusion that increased investment in operating assets by enterprises supports the established impact. The research enriches the literature on corporate financialization, offering a novel evaluative perspective for assessing the effects of the “VAT Reform” policy.