How Do Tax Incentives Lead to Investment Shifting? Evidence from China

Corporate VAT planning, though difficult to observe, has become more prominent. By considering the Chinese VAT transition as an external policy shock, this article adopts a difference-in-difference model to study this issue for the period 2006-2009. The results indicate that companies, in particular companies with high financing constraints and low type I agency costs, had investment-shifting behavior, so as to reduce the tax burden. Compared with agency costs, financing constraints have a greater influence on firms' shifting. Further, the market has a positive attitude toward shifting of high financing constraints companies, but a negative attitude toward that of high agency costs companies.