The role of tax incentives in the alleviation of corporate over-financialization: Evidence from China

Tax incentives, as an important auxiliary means for the government to stabilize the market, are crucial in motivating corporations to move from virtual to real. This article takes Chinese listed companies from 2008 to 2023 as the research object, analyzing the governance effect and internal mechanism of tax incentives on the over-financialization of real corporations. The results showed that tax incentives have a significant inhibitory effect on the over-financialization of real corporations by narrowing the cross-industry arbitrage gap. Compared to value-added tax incentives, income tax incentives have a stronger governance effect on the over-financialization of physical corporations. The impact of tax incentives on corporate behavior is not linear. Therefore, to avoid exacerbating financialization through a one-size-fits-all approach, value-added tax policies should be designed differently based on the level of corporation income tax preferential treatment obtained by the corporation. Finally, the subsample analysis shows that the inhibitory effect of tax incentives on over-financialization is more pronounced for non-SOEs, mature-to-declining corporations, and high-marketization regions. This study provides guidance for the government to implement tax incentives and thereby stimulate corporations to move from virtual to real.