The Uncertainty Of Equity Financing And Corporate Tax Avoidance

In the context of COVID-19 and trade frictions between China and the United States,the level of policy uncertainty around the world has increased significantly.China as one of the major economies in the world,the level of policy uncertainty has reached a historically high level in recent years.Policy uncertainty has become a specific characteristic of the external operating environment that all micro enterprises have to face.Obviously,the policy uncertainty will bring great influence to the corporates’ operation decisions.Existing researches also focus on the economic impact of policy uncertainty on corporate investment and financing.However,corporate tax avoidance,an important behavior widely existing in micro enterprises,has not been focused on by the research on policy uncertainty.This paper aims to explore the economic consequences of policy uncertainty from the perspective of corporate tax avoidance.However,EPU index,an important tool for the current research on policy uncertainty,is a relatively general concept,and the mechanism of action of this macro index on micro corporate tax avoidance is relatively complex.The researches on specific corporate tax avoidance based on this index will have limited enlightenments from the research.Therefore,this paper focuses on IPO suspension events in China,aiming to directly investigate the impact of equity financing uncertainty on corporate tax avoidance.Based on this specific research background,this paper hopes to provide more direct and specific empirical evidence to support relevant literature on policy uncertainty.As discussed above,this paper takes the IPO suspension events of 2008,2012 and 2015 in China as the research background,and the companies covered by the above events as the estimation window as the research object.Firstly,based on theoretical analysis,the paper examines the impact of equity financing uncertainty on corporate tax avoidance.Then,we explore the specific mechanism of the influence of equity financing uncertainty on corporate tax avoidance.Finally,this paper focus on the economic consequences of equity financing uncertainty on corporate tax avoidance.Through the above research,this paper draws the following main conclusions:Firstly,when the uncertainty level of equity financing acquisition is high,the tax avoidance degree of corporate will be higher.When enterprises are affected by the IPO suspension policy,they fail to obtain equity financing from the public market as expected and are forced to change their financing strategy and capital structure.In addition,a large amount of initial issuance fees failed to bring equity financing for enterprises as scheduled,which further aggravated the financing constraints of enterprises.Under the joint influence of the above two factors,enterprises are motivated to save cash outflow by engaging in more tax avoidance behaviors.Thus,we can observe that companies affected by the uncertainty of equity financing will have a relatively higher degree of tax avoidance.Secondly,the influence of multiple mechanisms will make companies more likely to avoid tax after being impacted by the uncertainty of equity financing acquisition.First of all,due to the relatively poor ability to resist risks,non-state-owned enterprises have fewer ways to obtain financing support,which makes them more likely to engage in tax avoidance under the influence of the uncertainty of obtaining equity financing.Secondly,companies with private equity support or venture capital will avoid tax less after being affected by the uncertainty of equity financing because of the relatively sufficient capital source and the improvement of their refinancing ability due to the reputation of venture capital institutions.Thirdly,enterprises with stronger solvency before IPO suspension will engage in tax avoidance less under the impact of IPO suspension policy because of lighter debt burden and stronger financing capacity.Finally,those companies with relatively strong financing constraints before IPO suspension will show higher degree of tax avoidance due to capital shortage under the influence of equity financing uncertainty.Thirdly,engaging in more tax avoidance during periods of high uncertainty in equity financing may lead to better market response and a smaller decline in investment intensity.From the perspective of market reaction,when enterprises are more aggressive in tax avoidance under the impact of the uncertainty of equity financing acquisition,the excess return rate of buying and holding after IPO will be relatively higher.From the perspective of investment intensity change,when enterprises are affected by IPO suspension policy,they will engage in more tax avoidance behaviors,which will reduce the decrease of fixed asset investment and R&D expenditure during IPO suspension.Furthermore,companies with higher IPO fees and less government subsidies before IPO suspension will show a smaller decline in investment intensity due to more tax avoidance under the impact of the uncertainty of equity financing access.However,when the auditor of corporate IPO is a relatively larger accounting firm,those companies that avoid tax more under the impact of IPO moratorium policy tend to get a relatively higher market return.Possible innovations in this paper include the following aspects:First of all,this paper takes China’s IPO suspension event as the research background,and more directly investigates the specific impact of equity financing uncertainty on enterprises.In this paper,the quasi-natural experiment method is adopted to distinguish whether the companies are affected by the uncertainty of equity financing acquisition,which overcomes the defect of the general definition of policy uncertainty in the existing literature.This study provides more relevant and direct evidence for the literature on the economic consequences of policy uncertainty.Secondly,in addition to explaining the economic consequences of equity financing acquisition uncertainty,this paper also reveals the specific measures for enterprises to deal with equity financing acquisition uncertainty from the perspective of enterprises.Existing studies only start from the perspective of explaining economic consequences and find that enterprises will increase their tax avoidance degree during periods of high policy uncertainty.The basic reasoning logic of this paper is that enterprises engage in tax avoidance when the acquisition of equity financing is uncertain,in order to make up for the gap that enterprises fail to get normal financial support in the equity financing market by reducing cash outflow.In other words,corporate tax avoidance during the IPO moratorium is a remedy.Third,existing literature only reveals that policy uncertainty may have a positive impact on enterprise investment and innovation from the perspective of growth option theory,does not pay more attention to the source of funds to promote investment and innovation.From the perspective of the flow of tax avoidance and surplus saving cash flow,this paper investigates the reallocation of cash saved by tax avoidance activities in the period of high uncertainty of equity financing acquisition.In addition,this paper also focuses on the stock market reaction to this behavior.In general,this paper also expands the research on the economic consequences of policy uncertainty from the perspective of capital flows.