Tax incentives and the formation of zombie firms

ABSTRACT

Due to the serious problem of overcapacity in China, we empirically analyse the impact of tax incentives on the formation of zombie firms. Using a sample of Chinese A-share listed firms from 2009 to 2019, we demonstrate that tax incentives can significantly inhibit the formation of zombie firms through innovation investments. Furthermore, heterogeneity analysis shows that this inhibitory effect is stronger for non-state-owned firms and firms in the eastern region than for other firms.

KEYWORDS:

• Tax incentives
• zombie firms
• innovation
• investment

JEL CLASSIFICATION:

• C23
• D21
• H25

Disclosure statement

No potential conflict of interest was reported by the author(s).

Author contributions

Shuo Yang performed the data analyses and wrote the manuscript; Yong Qi contributed to the conception of the study and manuscript preparation; Yudi Yang helped perform the analysis with constructive discussions.

Notes

¹ The ‘new normal’ refers to a shifted growth momentum and rebalanced economic structure.

² P represents the real profit after deducting subsides.

³ Inno is calculated as R&D investment/operating income.

⁴ We choose 2011 as the hypothetic year, while the analysis period is 2009–2013.

⁵ Liaoning, Jilin, and Heilongjiang implemented the accelerated depreciation policy in 2004. To avoid the confounding effect of the policy, we exclude the observations for these provinces for the robustness test.

Additional information

Funding

This work was supported by National Natural Science Foundation of China(No.71873027); Humanities and Social Science Foundation of Ministry of Education of China (No. 18YJA790063).