Tax Burden and Corporate Investment Efficiency

Round 1

Reviewer 1 Report

This article investigates Tax Burden and Corporate Investment Efficiency. I have the following comments that need to be addressed:

1.    The abstract needs improvements to include methodology, contributions, and originality.

2.    The introduction needs improvements; the objective of the paper should be discussed in the context of the discussion. This should be based on the research problem, questions, and theory discussions. The research problem and questions should be discussed in the introduction. Further, the research gap that justifies your contribution with theory underpinnings need to be discussed. It is necessary to discuss and mention how your research contributes to the strand literature.

3.    The introduction in its current format lacks for supportive literature. The authors should include most recent and up-to-date research studies.

4.    Equation (1) does not match with your variables. 

5.    some typos from electronic numbering of tables such as "Error! Reference source not found" please check and correct 

6.    the choice of your variables is not justified. more particularly, controlling variables are too much and are more likely to affect your results. You need to consider less control variables. Otherwise you have to include them in different stage of analysis under different scenarios. 

7.    The definition of some variables is not clear. for example, GOVER is defined as the Indicators of the level of corporate governance. This definition is not clear. You have to provide clear definition for your variables. 

 

 

 

 

Author Response

1. The abstract needs improvements to include methodology, contributions, and originality.

Thank you for this question. We have already mentioned” a fixed-effects model was used” in the first sentence of abstract. In the end of abstract, we have added “We provide a reference of tax reduction benefits to curb tax avoidance behaviour and provide a basis for relevant policy departments to further accelerate the implementation of tax reduction policies.”

 

2. The introduction needs improvements; the objective of the paper should be discussed in the context of the discussion. This should be based on the research problem, questions, and theory discussions. The research problem and questions should be discussed in the introduction. Further, the research gap that justifies your contribution with theory underpinnings need to be discussed. It is necessary to discuss and mention how your research contributes to the strand literature.

We have revised the introduction part according to the sugesstions. Please see introduction.

 

3. The introduction in its current format lacks for supportive literature. The authors should include most recent and up-to-date research studies.

We have added new reseearch studies in the introduction part according to the sugesstions. Please see introduction.

 

4. Equation (1) does not match with your variables. 

We have revised the Equation (1) as follows:

5. some typos from electronic numbering of tables such as "Error! Reference source not found" please check and correct 

We have checked all "Error! Reference source not found".

 

6. the choice of your variables is not justified. more particularly, controlling variables are too much and are more likely to affect your results. You need to consider less control variables. Otherwise you have to include them in different stage of analysis under different scenarios. 

Thanks. Following previous research, we control relevant variables in the models.

 

7. The definition of some variables is not clear. for example, GOVER is defined as the Indicators of the level of corporate governance. This definition is not clear. You have to provide clear definition for your variables. 

Drawing on the research methods of Hu Nan et al. (2021), Zhou Xi et al. (2020) and Zhang Xueyong and Liao Li (2010), this paper selects the following seven factors to measure the level of corporate governance: chairman and managing director concurrently (DUAL), natural logarithm of board size (BOARD), proportion of independent directors (DR), total remuneration of top three executives (Mana_Pay), executive shareholding (Mana_Share), the ratio of shareholding of the second to tenth largest shareholders to the shareholding of the controlling shareholder (Share_Balance), and the shareholding of institutional investors (Inst_Share). Principal component analysis was used to construct indicators of corporate governance level (GOVER), the larger the GOVER, the higher the level of corporate governance.

 

Reviewer 2 Report

- literature review on tax burden still can be improve

- in methodology part need more clearer what kind of method used

-what do you mean with "Error! Reference source not found" in some places of article

- writing structure must suitable with journal guideline

Author Response

1. literature review on tax burden still can be improve

Thank you for this question. We added some research in literature review. Please see Theoretical Analysis and Research Hypothesis.

 

2. in methodology part need more clearer what kind of method used

We use a fixed-effects model, OLS regressions on model ,Replacing the measurement of investment efficiency,Endogeneity test, Mechanism Analysis and Heterogeneity Analysis. Please see methodology part.

 

3. what do you mean with "Error! Reference source not found" in some places of article

We may use different versions and I do not find any "Error! Reference source not found" in my paper.

 

4. writing structure must suitable with journal guideline

Thanks and I have revised the writing structure accourding to journal guideline.

Author Response File: Author Response.docx

Reviewer 3 Report

Comments for author File: Comments.pdf

Author Response

1. Variations in the tax burden

The authors should provide additional information on the variation in the tax burden. Figure 1 highlights the aggregate time-series variation in tax burden. If time-series variation is the onlysource of the variance in tax reduction, it is very difficult to rule out the possibility that the changesin investment efficiency are driven by some other omitted variables that can exhibit certain time trends. The authors have recognized this potential concern and included time-fixed effects in their regressions. By doing so, the tax reductions must show cross-sectional variations. I would reasonably suspect this is true in the data, but I suggest the authors provide more descriptive evidence on the sources of variations for tax reductions.

Thank you for this question. Please see descriptive evidence as follows:

Table 1                          2009-2021Desctibtive statistics
Year	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Tax	.0722	.0693	.0720	.0739	.0727	.0749	.0769	.0749	.0701	.0686	.0649	.0636	.0577

 

 

2. Economic channels

The authors mention several economic channels in Section 2. However, other than the financial constraint channel, I do not find other channels convincing.

For example, on Page 3, the authors state that “from the perspective of the company's managers,the additional cash flows generated by the lower tax burden can be used to motivate managers to fully exploit their talents to make scientific investment decisions”, and “compared to the role of anagent, managers prefer to take on the role of a steward (Chen Zhibin et al., 2020) when they are incentivised with tax savings, and by making full use of their talents, they can rationalise the allocation of corporate resources and improve investment efficiency.”

I have a difficult time understanding these statements. If the authors are trying to link the tax

burden to agency conflicts, then the reduction of the tax burden should increase the free cash flows of the firm, which should exacerbate agency conflicts rather than alleviate them (e.g., Jensen and Meckling, 1976). Similarly, I also do not find the tax avoidance channel compelling. It is not clear why tax avoidance is related to investment efficiency.

On the other hand, I do find the channel of financial constraints to be intuitive. It is straightforward to see that reduction of tax burden relaxes financial constraints, which in turn may lead to improvement of investment efficiency. My suggestion is that the authors should focus on the financial constraints channel and discuss in detail why the relaxation of financial constraints can mitigate both under-investment and over-investment.

I suggest the authors make connections to important existing studies on related topics. For example, Faulkender and Petersen (2012) show that financially constrained firms increase their investments after they experience tax cuts due to the American Jobs Creation Act (AJCA). 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. 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). 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 productmarket 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). 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; Dou, Ji, Reibstein, and Wu, 2021), which can help improve firms’ investment efficiency in general.

We have added relevant parts accoring to your suggestions. Please see 5.1.2. Financing constraints

 

3. Heterogeneity analysis

Section 5.2 presents a set of heterogeneity analysis. I find the results shown in this section to be rather uninformative. The economic difference between the coefficients in the subsamples of Tables 8 – 10 is very small. For example, in Table 10, the coefficient for the tax burden is 0.0403 in column (1), while it is 0.041 in column (2). This difference is too small to draw any meaningful conclusion. My suggestion for the authors is to delete Section 5.2 in its entirety.

Thanks and we have deleted Section 5.2.

In terms of your suggestion that the coefficient gap in Table 10 is too small and the result is not obvious. The article has been tested to prove the point. In order to show whether there are significant differences, the chow text test was conducted. According to the test results, it can be shown that there are significant differences (P value is 0, which is significant at 1% level).

 

Author Response File: Author Response.docx

Round 2

Reviewer 1 Report

The changes are incorporated 

Reviewer 3 Report

The current manuscript looks good to me. I can sign off now.