Tax law enforcement and corporate environmental investment: evidence from China

Whether and how tax law enforcement affects firms' environmental responsibilities remains underexamined in the literature. Drawing on Desai, Dyck, and Zingales's (2007) notion that tax law enforcement creates a mechanism for monitoring corporate insiders, we propose that the tax authority drives firms to invest in green initiatives by mitigating information asymmetry between environmental stakeholders and insiders and consequently strengthening the effectiveness of monitoring by these stakeholders. Taking advantage of the phased roll out of the Golden Tax Program (GTP) III in China during 2013 to 2016, we use the difference-in-differences method to empirically study the effect of tax law enforcement on firms' environmental investment. Our results based on a sample of listed firms in China from 2007 to 2020 suggest that environmental investment is positively related to GTP III. We also find that the relationship between environmental investment and GTP III is stronger for firms located in regions in which environmental regulators are under more severe resource constraints, for firms with fewer institutional shareholdings, and for firms with less media coverage. These results suggest that GTP III impacts environmental investment by influencing monitoring by key environmental stakeholders. Our analysis of heterogeneity shows that the impact of GTP III on environmental investment is strengthened by industry pollution intensity and weakened by state ownership. Our economic consequences analysis suggests that GTP III improves firm performance through improving corporate environmental investment. The implications of this study are significant because it reveals that tax law enforcement has spillover effects on stakeholders.