5.1.1. Degree of Tax Avoidance
Broadly speaking, tax avoidance refers to any behavior that reduces a company’s explicit tax obligations. Tax avoidance by companies achieves the objective of retaining cash flows and after-tax income in the company [
28,
29,
30,
31]. Thus, when faced with excessive tax burdens, companies tend to choose to alleviate financial pressure through tax avoidance practices. However, at the same time, tax avoidance is often hidden and complex, which can increase the financial complexity and create risks for companies. On the one hand, tax avoidance activities are monitored by the tax authorities. When tax avoidance is discovered by the tax authorities, there is a risk of high penalties and damage to the company’s reputation. On the other hand, companies often face serious problems of low transparency, if they are unable to clarify the financial complications resulting from tax avoidance to various investors and analysts [
32]. The concealment and complexity of tax avoidance practices can exacerbate internal and external information asymmetries in companies [
33], which can lead to agency problems and damage shareholder value. Studies show that tax avoidance is positively related to share price collapse [
34], agency costs and debt costs [
26,
35], while it is positively related to firm investment efficiency and operating performance [
36] and firm value are negatively correlated.
Information asymmetry and agency problems are important determinants of investment efficiency. Adverse selection and moral hazards caused by information asymmetry will cause inefficient allocation of corporate capital [
37,
38]. When there is serious information asymmetry within the company, managers with information advantages tend to adopt opportunistic behavior to maximize their own interests, which may result in managers’ investment decisions not being the optimal investment level and low investment efficiency. Agency problems can also lead to inefficient corporate investment [
39]. This is mainly because the interests of managers and shareholders are inconsistent when the two powers are separated, so managers tend to choose projects that can bring private benefits but have negative NPV, which results in over-investment. Managers may also reject projects with high risk but positive NPV in order to improve their irreplaceability in the company and avoid damage to reputation if the projects fail, resulting in under-investment.
Based on the above analysis, the company’s behavior of increasing cash flow by reducing operating costs through tax avoidance will aggravate the information asymmetry and agency problems within the company, which will result in inefficient investment [
40]. Based on the background of the tax reduction and fee reduction policy, the internal free cash flow of the company increases correspondingly when the tax burden of the company decreases, and the motivation of tax avoidance of the company weakens. Compared with tax avoidance with complicated operations and high risks, companies are more inclined to reduce their tax burdens and tax costs by virtue of the burden-reducing effect brought by policy advantages. Therefore, when companies can mitigate tax avoidance by reducing the burden of policy advantages, information asymmetry and agency problems are suppressed to a certain extent, corporate information transparency is improved, and investment efficiency is enhanced.
To provide a mechanistic test of the extent of tax avoidance, this paper uses two methods to measure the extent of tax avoidance (TA), namely accounting-tax differences and their variants. First, drawing on Desai and Dharmapala (2006), Chan et al. (2016) and Wei et al. (2020) [
30,
41], the accounting-tax difference (BTD) is used to measure the extent of corporate tax avoidance. The reason for choosing accounting-tax differences as a measure is that Chan et al. (2010) found that accounting-tax differences of Chinese listed companies have a significant positive correlation with tax audit adjustments (TAAs), issued by the tax authorities. Therefore, it is generally applicable and reasonable to use accounting-tax differences as an important indicator for tax authorities to determine whether tax avoidance exists in listed companies. The specific calculation method is as follows: BTD = (pre-tax accounting profit − taxable income)/total assets at the end of the period, where taxable income = (income tax expense − deferred income tax expense)/nominal income tax rate, and the larger the BTD, the higher the likelihood that the firm is using BTD for tax avoidance behavior. Secondly, the degree of corporate tax avoidance measured by the difference between accounting book and actual tax liabilities (DDBTD), calculated using the fixed-effects residual method, is also widely used [
42], which is shown in Model (3), where TACC is the total accrued profit, which is numerically equal to (net profit − net cash flows from operating activities)/total assets, and DDBTD is equal to the sum of
in model (3).
In order to test the mechanism of tax avoidance in tax reduction to improve investment efficiency, Models (4) and (5) are developed in this paper. In particular, Model (4) is used to test whether a lower tax burden can significantly inhibit corporate tax avoidance, i.e., the first step of the mechanism test. When the coefficient
of Taxburden in Model (4) is significantly positive, it indicates that tax avoidance is reduced as the tax burden faced by the company decreases, and tax avoidance is mitigated. Adding both the tax burden (Taxburden) and the extent of tax avoidance (TA) to the regression model, i.e., Model (5), is the second step in the mechanism test. In the Model (5), the coefficient
is for tax burden (Taxburden), and
is for the degree of tax avoidance (BTD). Combined with Model (4), when both
and
are significantly positive, it indicates that the degree of tax avoidance plays a mechanism role in tax burden affecting investment efficiency, i.e., a lower tax burden can improve investment efficiency by reducing the degree of tax avoidance of firms.
Table 6 presents the regression results for the mechanism test on the extent of tax avoidance. Of these, columns (1) and (2) show the regression results using the BTD measure of the extent of tax avoidance. The coefficient of Taxburden in column (1) is 0.112 and is significant at the 1% level, indicating that when the tax burden decreases, there is a corresponding decrease in corporate tax avoidance. This may be due to the fact that a lower tax burden increases a firm’s internal cash flow and, in order to avoid the risk of tax avoidance being detected, it will spontaneously reduce the behavior of keeping more cash in the firm through tax avoidance. The coefficients of tax burden and tax avoidance (BTD) in column (2) are also positive and significant at the 1% level, indicating that the mechanism of tax avoidance is verified, i.e., the reduction of tax burden alleviates information asymmetry and agency problems to a certain extent by discouraging corporate tax avoidance, and improves corporate information transparency, thus promoting investment efficiency. Columns (3) and (4) show the regression results of the degree of tax avoidance measured using DDBTD. Among them, the signs of the coefficients of tax burden (Taxburden) and degree of tax avoidance (BTD) are in line with expectations and significant, indicating that the mechanism test for the degree of tax avoidance is somewhat robust.
5.1.2. Financing Constraints
According to the above research results, we can find that reducing the tax burden of enterprises is helpful to improve the investment efficiency of enterprises. Faulkender and Petersen (2012) also show that financially constrained firms increase their investments after they experience tax cuts due to the American Jobs Creation Act (AJCA) [
43]. These increased investments are probably positive NPV projects and, thus, the findings of Faulkender and Petersen (2012) are consistent with the idea that tax reduction can reduce under-investment of positive NPV projects. However, it is still necessary for us to further analyze through what channels the reduction of tax revenue affects the investment efficiency of enterprises. In a recent study, Dou, Johnson and Wu (2022) show that financially constrained firms compete less aggressively in the product market and become less distressed after they experience tax cuts due to the American Jobs Creation Act (AJCA) [
44]. Their findings imply that additional tax burden can lead to the amplification of financial constraint through the mechanism of product market competition, rendering firms making less efficient investment decisions. The product market competition channel helps magnify the impact of the changes in tax burden. This amplification effect can be essential, because it can offset the opposite effects coming from the free cash flow channel (e.g., Jensen and Meckling, 1976). In addition, the reduction of corporate tax burden and the increase of free cash flow effectively alleviate the internal financing constraints of enterprises, and “de-leverage” and “cost reduction” of enterprises [
19,
45]. It [
20,
46] has a significant and positive effect on the company’s long-term competitiveness. This will send good information to the outside world. Based on the signaling theory, the company’s future growth prospects can improve the confidence of external investors, thus, it is easier to attract and obtain external financing. Generally speaking, enterprises can improve their own profit level and corporate liquidity by easing financing constraints [
15]. According to the existing research, the improvement of corporate profit level and liquidity can stimulate R&D and innovation [
17], therefore, it can alleviate the situation of insufficient investment of enterprises and improve the investment efficiency of enterprises. Finally, the relaxation of financial constraints can help firms maintain their human capital, especially key talents, such as innovators and managers who are specialized in making efficient investment decisions (e.g., Grieser and Liu, 2019 [
47]; Dou, Ji, Reibstein, and Wu, 2021) [
48], which can help improve firms’ investment efficiency in general.
To sum up, the reduction of corporate tax burden helps to alleviate the financing constraints faced by enterprises, thus achieving the purpose of improving the investment efficiency of enterprises.
In this paper, the SA index is chosen for the following reasons: Firstly, the variables used to calculate the SA index are relatively exogenous and more objective; secondly, the SA index is relatively robust, and its measure of the degree of financing constraints is consistent with the results of the WW index and cash-flow sensitivity. The specific construction formula is: SA = −0.737 × Size + 0.043 × Size
2 − 0.04 × Age, where Size is the natural logarithm of the firm’s total assets, and Age is the firm’s year of establishment. The SA index calculated in this paper is positive, and the larger the value, the lower the degree of financing constraints faced by the firm. The SA index is used to replace the tax avoidance (TA) in Models (4) and (5), respectively, to test the mechanism effect of financing constraints. Meanwhile, to alleviate the endogeneity problem of the variables, this paper does not use the natural logarithm of total assets (Size) as a control variable, but uses the natural logarithm of total market capitalization (Logvalue) to measure firm size added to the regression model [
49], and the regression results are shown in
Table 7.
The coefficient of Taxburden in column (1) of
Table 7 is −0.620 and is significant at the level of 1%, indicating that when the tax burden of an enterprise is reduced, the degree of financing constraint of the enterprise is reduced, i.e., tax reduction increases endogenous financing by keeping more cash in enterprises, while attracting exogenous financing by sending positive signals to the outside through improving liquidity position, increasing profit level, etc. To a certain extent, the purpose of the tax cut is to alleviate the financing constraint of the enterprises by means of improving the liquidity position, increasing the profit level, etc. The results are shown in column (2) of
Table 7, where both the tax burden (Taxburden) and the degree of financing constraint (SA) are added to the model. The coefficient of Taxburden in column (2) is significantly positive, while the coefficient of SA is significantly negative, indicating that tax cuts can improve investment efficiency by easing corporate financing, and the mechanism effect of financing constraints is verified.