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

•We explore the causes of the financialization of China's real sector from the perspective of public policy.•We exploit the policy of accelerated depreciation as a natural experiment to study the effect of tax incentives on corporate financialization.•We find that the accelerated depreciation p...

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Bibliographic Details
Published in:Finance research letters 2023-01, Vol.51, p.103505, Article 103505
Main Authors: Li, Xing, Shen, Guangjun
Format: Article
Language:English
Subjects:
Financialization
Higher-return seeking
Precautionary saving
Tax incentive
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Summary:•We explore the causes of the financialization of China's real sector from the perspective of public policy.•We exploit the policy of accelerated depreciation as a natural experiment to study the effect of tax incentives on corporate financialization.•We find that the accelerated depreciation policy reduces corporate financialization.•The accelerated depreciation policy decreases the cost of investment in fixed assets, making financial investment less attractive. 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 accelerated 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.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2022.103505