Digitalization of tax information and its impact on mitigating debt default risk – insights from overdue bank loans of publicly traded firms in China

Abstract This study examines how two major government initiatives in China, the Golden Tax Project III (GTP III) and the Bank-Tax Interaction (BTI), jointly affect overdue bank loans. By compiling detailed data on bank loan defaults during the rollout of GTP III and the introduction of BTI, the study finds a marked decline in corporate debt default risk. This improvement is linked to greater information transparency and lower agency costs. The positive effects are most pronounced among firms with strong tax credit ratings and low media coverage, and in regions with weaker legal environments. State-owned and local banks benefit the most, while non-state-owned and non-local banks see little to no improvement. Enhanced data-sharing between tax authorities and banks also helps limit firms’ participation in risky external debt guarantees. These findings highlight the advantages of advanced data-sharing systems for reducing loan default risks and bolstering financial stability. However, the study also points out the need for improved coordination to ensure that all banks-regardless of ownership or location-can benefit equally. Overall, optimizing information-sharing practices could help create a more level playing field and further reduce corporate debt risks within China’s banking sector.