Tax incentives and the financialization of the real sector: Evidence from the accelerated depreciation policy in China

Firms in the real sector are experiencing the process of financialization. Using data from China's listed firms, this study exploits the accelerated depreciation policy as a natural experiment, investigating the effect of tax incentives on corporate financialization. We find that the acceler-ated depreciation policy significantly reduces corporate financialization. We test two possible motives of precautionary saving and higher-return seeking. Our evidence supports that the latter channel is active - the accelerated depreciation policy decreases the cost of investment in fixed assets, making financial investment less attractive.

Automated summary

Using China's listed firms as data, this study examines the impact of tax incentives on corporate financialization through the natural experiment of accelerated depreciation policy. The findings indicate that the policy significantly decreases corporate financialization. The research also supports the theory that the decreased cost of investment in fixed assets, resulting from the policy, reduces the attraction to financial investment.