IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_11180.html
   My bibliography  Save this paper

Investor Tax Breaks and Financing for Start-Ups: Evidence from China

Author

Listed:
  • İrem Güçeri
  • Xipei Hou
  • Jing Xing
  • Irem Guceri

Abstract

We examine how investor-level tax incentives affect financing for start-ups using the introduction of a generous tax deduction for qualified angel and VC investment in China as a quasi-natural experiment. We find that the tax incentive increases funding for eligible start-ups, with stronger responses from larger and more experienced investors. The tax incentive leads to substitution between eligible and non-eligible investments. There is no evidence that the tax incentive lowers investment quality. We further show that the investor-level tax incentive encourages firm entry into affected industries, especially in cities more exposed to venture capital funds.

Suggested Citation

  • İrem Güçeri & Xipei Hou & Jing Xing & Irem Guceri, 2024. "Investor Tax Breaks and Financing for Start-Ups: Evidence from China," CESifo Working Paper Series 11180, CESifo.
    • Handle: RePEc:ces:ceswps:_11180
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp11180.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sebastian Calonico & Matias D. Cattaneo & Rocio Titiunik, 2014. "Robust data-driven inference in the regression-discontinuity design," Stata Journal, StataCorp LP, vol. 14(4), pages 909-946, December.
    2. Sampsa Samila & Olav Sorenson, 2011. "Venture Capital, Entrepreneurship, and Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 338-349, February.
    3. Keuschnigg, Christian & Nielsen, Soren Bo, 2004. "Start-ups, venture capitalists, and the capital gains tax," Journal of Public Economics, Elsevier, vol. 88(5), pages 1011-1042, April.
    4. Zhao Chen & Zhikuo Liu & Juan Carlos Suárez Serrato & Daniel Yi Xu, 2021. "Notching R&D Investment with Corporate Income Tax Cuts in China," American Economic Review, American Economic Association, vol. 111(7), pages 2065-2100, July.
    5. Xuan Tian & Jiajie Xu, 2022. "Do Place-Based Policies Promote Local Innovation and Entrepreneurship? [A model of growth through creative destruction]," Review of Finance, European Finance Association, vol. 26(3), pages 595-635.
    6. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2013. "Who Creates Jobs? Small versus Large versus Young," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 347-361, May.
    7. Cui, Wei & Hicks, Jeffrey & Xing, Jing, 2022. "Cash on the table? Imperfect take-up of tax incentives and firm investment behavior," Journal of Public Economics, Elsevier, vol. 208(C).
    8. Lora Dimitrova & Sapnoti K Eswar, 2023. "Capital Gains Tax, Venture Capital, and Innovation in Start-Ups," Review of Finance, European Finance Association, vol. 27(4), pages 1471-1519.
    9. Cumming, Douglas & Dai, Na, 2010. "Local bias in venture capital investments," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 362-380, June.
    10. Edwards, Alexander & Todtenhaupt, Maximilian, 2020. "Capital gains taxation and funding for start-ups," Journal of Financial Economics, Elsevier, vol. 138(2), pages 549-571.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gao, Wenjing & Mao, Jie & Shi, Xinzheng, 2024. "Do firms benefit from public information services: Evidence from a tax hotline program in China," China Economic Review, Elsevier, vol. 83(C).
    2. Cole, Rebel & Cumming, Douglas & Li, Dan, 2016. "Do banks or VCs spur small firm growth?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 60-72.
    3. Andrew T. Young & Matthew J. Higgins & Donald J. Lacombe & Briana Sell, 2014. "The Direct and Indirect Effects of Small Business Administration Lending on Growth: Evidence from U.S. County-Level Data," NBER Working Papers 20543, National Bureau of Economic Research, Inc.
    4. Christos Kolympiris & Sebastian Hoenen & Nicholas Kalaitzandonakes, 2018. "Geographic distance between venture capitalists and target firms and the value of quality signals," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 27(1), pages 189-220.
    5. Daniel Hain & Sofia Johan & Daojuan Wang, 2016. "Determinants of Cross-Border Venture Capital Investments in Emerging and Developed Economies: The Effects of Relational and Institutional Trust," Journal of Business Ethics, Springer, vol. 138(4), pages 743-764, November.
    6. Matthew J. Higgins & Donald J. Lacombe & Briana S. Stenard & Andrew T. Young, 2021. "Evaluating the effects of Small Business Administration lending on growth," Small Business Economics, Springer, vol. 57(1), pages 23-45, June.
    7. Jing Xing & Katarzyna A. Bilicka & Xipei Hou & Sepideh Raei, 2022. "How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT," NBER Working Papers 29650, National Bureau of Economic Research, Inc.
    8. Yang, Laifeng & Wang, Qing Sophie & Lai, Shaojie, 2023. "Fair and square: The impact of judicial independence on entrepreneurship," Finance Research Letters, Elsevier, vol. 55(PB).
    9. Kristina McElheran & J. Frank Li & Erik Brynjolfsson & Zachary Kroff & Emin Dinlersoz & Lucia Foster & Nikolas Zolas, 2024. "AI adoption in America: Who, what, and where," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 33(2), pages 375-415, March.
    10. Duan, Liaoliao & Sun, Weizeng & Zheng, Siqi, 2020. "Transportation network and venture capital mobility: An analysis of air travel and high-speed rail in China," Journal of Transport Geography, Elsevier, vol. 88(C).
    11. He, Fan & Zeng, Xin & Xue, Jingwen & Xu, Jianbin, 2024. "The hidden cost of corporate tax cuts: Evidence from worker health in China," China Economic Review, Elsevier, vol. 86(C).
    12. Francesco Manaresi & Carlo Menon & Pietro Santoleri, 2021. "Supporting innovative entrepreneurship: an evaluation of the Italian “Start-up Act” [The effects of entry on incumbent innovation and productivity]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 30(6), pages 1591-1614.
    13. Takahashi, Hidenori & Yamakawa, Yasuhiro & Mathew, Prem G., 2018. "Board members' influence on resource investments to start-ups and IPO outcomes: Does prior affiliation matter?," Pacific-Basin Finance Journal, Elsevier, vol. 49(C), pages 30-42.
    14. Suting Hong & Konstantinos Serfes & Veikko Thiele, 2020. "Competition in the venture capital market and the success of startup companies: Theory and evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 741-791, October.
    15. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 573-648, Elsevier.
    16. Liaoliao Duan & Dongxiao Niu & Weizeng Sun & Siqi Zheng, 2021. "Transportation infrastructure and capital mobility: evidence from China’s high-speed railways," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 67(3), pages 617-648, December.
    17. Niccolò Ghio & Massimiliano Guerini & Cristina Rossi-Lamastra, 2019. "The creation of high-tech ventures in entrepreneurial ecosystems: exploring the interactions among university knowledge, cooperative banks, and individual attitudes," Small Business Economics, Springer, vol. 52(2), pages 523-543, February.
    18. Saras D. Sarasvathy, 2021. "The Middle Class of Business: Endurance as a Dependent Variable in Entrepreneurship," Entrepreneurship Theory and Practice, , vol. 45(5), pages 1054-1082, September.
    19. Fabio Bertoni & Massimo G. Colombo & Anita Quas, 2019. "The Role of Governmental Venture Capital in the Venture Capital Ecosystem: An Organizational Ecology Perspective," Entrepreneurship Theory and Practice, , vol. 43(3), pages 611-628, May.
    20. Howell, Sabrina T. & Rathje, Jason & Van Reenen, John & Wong, Jun, 2021. "Opening up military innovation: causal effects of reforms to US defense research," LSE Research Online Documents on Economics 114430, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    venture capital; angel investment; tax incentives; entrepreneurship;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_11180. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.