Summary:
Huge declines in corporate performance not only results in significant economic losses for investors but also affects the development of other corporations in the group and upstream and downstream enterprises. Thus, it is not conducive to the development of a stable and healthy capital market. Moreover, many corporations have complex economic networks with hidden economic links, creating pathways through which economic events can have ripple effects at the regional, industry, or even national level. Large declines in corporate performance, a prominent phenomenon in China's capital market in recent years, may create negative externalities through such economic networks. However, both practical and academic discussions of the economic impact focus on the affected corporation and directly related corporations. Therefore, we lack reliable empirical evidence of whether it affects corporations that are not directly related. In a market economy, corporations can build broad economic networks through economic transactions and have indirect links with other corporations via the government. In China's market, there are long-term economic links between the government and corporations, with taxation being the most common. This link provides a useful perspective for examining the spillover effects of large declines in corporate performance. Tax collection efforts by tax authorities adapt to changes in the external environment, which affects the tax burdens of regional corporations. Specifically,when there is a sudden large decline in corporate performance, particularly by major corporations,there will be a corresponding sharp decrease in tax payments. This affects the annual tax collections by tax authorities, which in turn increases their efforts to collect tax from other local corporations and ultimately increases the tax pressure on those corporations. To verify this hypothesis, this paper examines the influence of the huge declines in corporate performance on the tax pressure experienced by other local corporations using 2008-2018 data on A-share listed corporations. The CSMAR, Wind, and RESSET financial research databases are used to gather firm-level financial data, and the CEIC China Economic Database is used to obtain the macroeconomic data. According to the test results, the tax burden of other local corporations significantly increases following a large decline in some corporate performance within a city. The results of the mechanism test show that the tax collection authorities in a region experience tax collection pressure as a result of a large decline in corporate performance, so they increase their tax collection efforts in the short term, creating the aforementioned spillover effect. Furthermore, we find that the effect is stronger following performance declines by pillar corporations and that pillar corporations and corporations with higher quality of earnings suffer greater tax pressure than their counterparts after a huge decline in corporate performance within a city. Finally, a large decline in regional corporate performance may stymie the investment activities of other local corporations and harm their market value. This paper makes the following contributions. First, it is the first to show that a large decline in corporate performance has a broad spillover effect. Moreover, we find that such an event has negative externalities for corporations that are not directly related. This finding not only provides market participants with a more thorough understanding of the spillover consequences of a large decline in corporate performance but also presents scholars with new ideas to investigate the economic externalities of other unexpected events. Second, this paper broadens academic understanding of the issues that determine corporate tax burdens. Few studies consider how a corporation's tax burden affects other corporations. We find that a large decline in corporate performance disrupts local governments' tax planning and thus increases the tax burdens of other local corporations. Third, this paper has reference value for implementing tax cuts and policies to reduce tax burdens. We find that a huge decline in corporate performance increases the tax burden of other local corporations, decreasing investment and damaging market value. Other unexpected economic events in recent years may have had comparable spillover consequences. This paper could assist government departments in determining how to deepen tax reform and improve the flexible taxation system to deal with unexpected situations.
戴亦一, 纪翔阁, 宁博, 潘越. 企业业绩爆雷的溢出效应——来自地区企业税负的证据[J]. 金融研究, 2023, 512(2): 134-151.
DAI Yiyi, JI Xiangge, NING Bo, PAN Yue. The Spillover Effect of Huge Declines in Corporate Performance: Evidence from Corporate Tax Burdens. Journal of Financial Research, 2023, 512(2): 134-151.
Acemoglu, Daron, Asuman Ozdaglar, and Alireza Tahbaz-Salehi. 2015. “Systemic Risk and Stability in Financial Networks”, The American Economic Review, 105(2):564～608.
[25]
Burgstahler, David, and Ilia Dichev. 1997. “Earnings Management to Avoid Earnings Decreases and Losses”, Journal of Accounting and Economics, 24(1):99～126.
[26]
Chen, Ting, and James K.-S. Kung. 2016. “Do Land Revenue Windfalls Create a Political Resource Curse？ Evidence from China”, Journal of Development Economics, 123(11):86～106.
[27]
Dai, Yunhao, Raghavendra P. Rau, Aris Stouraitis, and Weiqiang Tan. 2020. “An Ill Wind？ Terrorist Attacks and CEO Compensation”, Journal of Finance Economics, 135(2):379～398.
[28]
Delgado, Francisco J., Elena Fernández-Rodríguez, and Antonio Martínez-Arias. 2018. “Corporation Effective Tax Rates and Company Size: Evidence from Germany”, Economic Research, 31(1):2081～2099.
[29]
Denis, David J., and Timothy A. Kruse. 2000. “Managerial Discipline and Corporate Restructuring Following Performance Declines”, Journal of Financial Economics, 55(3):391～424.
[30]
Easterwood, John C., Özgür Ş. īnce, and Charu G. Raheja. 2012. “The Evolution of Boards and CEOs Following Performance Declines”, Journal of Corporate Finance, 18(4):727～744.
[31]
Gredajlovic, Eric, Toru Yoshikawa, and Motomi Hashimoto. 2005. “Ownership Structure, Investment Behavior and Firm Performance in Japanese Manufacturing Industries”, Organization Studies, 26(1):7～35.
[32]
Hertzel, Michael G., Zhi Li, Micah S. Officer, and Kimberly J. Rodgers. 2008. “Inter-Firm Linkages and the Wealth Effects of Financial Distress along the Supply Chain”, Journal of Financial Economics, 87(2):374～387.
[33]
Kiyotaki, Nobuhiro, and John Moore. 1997. “Credit Cycles”, Journal of Political Economy, 105(2):211～248.
[34]
Pandey, I. M., and Visit Ongpipattanakul. 2015. “Agency Behavior and Corporate Restructuring Choices during Performance Decline in an Emerging Economy”, International Journal of Managerial Finance, 11(2):244～267.
[35]
Ref, Ohad, and Zur Shapira. 2017. “Entering New Markets: The Effect of Performance Feedback Near Aspiration and Well Below and Above it”, Strategic Management Journal, 38(7):1416～1434.
