Corporate Tax Reform and Firm Share Price: Evidence from China

We apply the event study method on China’s historical tax reform over a decade ago when dual-track corporate tax rates were terminated. The Enterprise Income Tax Law of 2008 (the Law) imposed equal income tax rates for both foreign and domestic firms, by removing tax concessions for foreign firms and lowering tax rates for domestic firms from 33% to 25%. This tax reform provides a natural experiment in the largest emerging market. Through listed firms on the Shanghai and Shenzhen Stock Exchanges, we find that the corporate income tax reform has significant and positive impact on firm share prices, moderated by ownership structure, tax aggressiveness, and stock exchange differences.