Abstract:
Under the tax-sharing system, local protection has aggravated local government’s intervention on local capital resource allocation. Based on 247 “shell deals” from 1998 to 2012 in Shanghai and Shenzhen A-share market, when local protection is measured by the proportion of the sum of enterprise income tax,value-added tax and business tax in fiscal revenue, the proportion of enterprise income tax or business tax in fiscal revenue, we find that the higher the degree of local protection is, the more likely the shell company is to be bought by local companies and maintain their state-owned property. However, this impact is not pronounced when the local protection is measured by the proportion of added-value tax in fiscal revenue.When “shell company” is bought by non-local companies, its staff and labor cost reduce significantly and its operating performance becomes better.
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