VAT Transformation And Its Impact On Efficiency Of Investment

Studying interaction effects of macroeconomic policies and enterprise’s behaviors has become a popular topic in Accounting and Finance research. Based on this perspective, this paper studies the impact of VAT transformation on enterprise’s efficiency of investment.CCP and State Council plan the VAT transformation program to revitalize the northeast old industrial base, and to guide the national implementation of the VAT reform since July1,2004. Then,26cities in Middle of China,5cities in east of Inner Mongolia and the Area of Wenchuan Earthquake joined in the reform team."PRC Provisional Regulations on VAT (State Council No.538) and "PRC Provisional Regulations Implementing Rules on VAT(Tax No.50) were implemented in January1,2009, it means the comprehensive transformation of VAT. The main contents of the VAT transformation are to allow the general VAT taxpayers purchasing fixed assets to be deducted from the output tax Comprehensively implemented in2009, which means the industry is not limited, integrates the national VAT policy. The deductible of new machinery and equipment are available.VAT transformation as a major finances and tax policy, it impacts on the macroeconomic, finances and tax income, employment status significantly, and enterprise is primary focus. This study focuses on the impact of VAT transformation on efficiency of enterprise investment. The first reason, the efficiency of investment is highly correlated with the scale of investment and investment behavior, while VAT has a direct impact on the transformation of the scale of investment and investment behavior, to study the impact on the efficiency of investment is worth. The second reason, the efficiency of macroeconomic investment and enterprise investment are low. Because the rapid economic growth and the requirement of comprehensive deepening reform, how to improve efficiency of investment has become a focus of concern. Thirdly, investment is an important part in finance, efficiency of investment is an important point in financial researching and practicing. Based on these reasons, to study the impact of the VAT transformation on enterprise, efficiency of investment is a good starting point.Financing constraints hypothesis is consistent with the assumption that under the premise of interests between shareholders and management. Due to the information asymmetry, when enterprises invest by external financing, outside investors will not invest or request additional compensations. When the information asymmetry is higher, enterprises are more difficult to get financing from the capital markets, or be asked to pay a very high financing costs. They have to rely on their own during the time of investment funds, have to give up some projects which NPV is greater than0, resulting in insufficient investment. VAT transforms from production-based to consumption-based, VAT can be deducted the purchase of fixed assets, net operating cash flow increases the enterprise’s disposable income. Considering the hypothesis of financing constraints, VAT transformation reduces enterprise’s financing constraints, for enterprises which is investment inhibit, improves the efficiency of investment.Free Cash Flow hypothesis stems from agency problems, by the reducing of free cash flow, the enterprise can ease the conflict between managers and owners. When companies generate a lot of free cash flow, the results from the operator’s hard work are shared by the shareholders and managers, but costs are borne by the manager alone. This asymmetry is bound to make managers will choose investment projects which is personal interests rather than the interests of maximizing shareholder, and will be more inclined to waste behavior and unwise use of free cash flow. All of these, will lead to lower marginal efficiency of investment.From the view of increase investment hypothesis, VAT transformation policies will promote investment, while enterprises accelerate technological upgrading, improving the efficiency of investment.This study uses difference-in-difference method, by distinguishing over-investment and under-investment, the State-owned enterprises and Private enterprise, researched the efficiency of investment, and the impact of VAT transformation on efficiency of investment. Specifically, this study is organized as follows:Chapter1IntroductionThis section introduces the research background, purpose and meaning, research ideas and methods, structures and the possible contribution of this study. The DID method is important in this study.Chapter2Literature ReviewBecause the study of impact on efficiency of investment under VAT transformation is little, so we review the papers respectively. From the list of papers, we differs our study’s differences.Chapter3Institutional Introduction and Theoretical AnalysisFirstly, introduces the background and specific implementation of structural tax cuts and the "Business tax changed to VAT" policy. Secondly, introduce the background and specific measures of VAT transformation policy in detail. This study relates to the financing constraints hypothesis, free cash flow hypothesis and increase investment hypothesis.Chapter4Study DesignThis section includes research hypotheses, samples and data selection, variable selection and model design. Based on the institutional introduction and theoretical analysis, we posed research hypotheses. Then, chose rational data and variable, construct model. All of these is an important part of the empirical research.Chapter5Empirical AnalysisThis section includes sample distribution, descriptive statistics and correlation analysis of data, regression analysis and conclusions robustness. It also is one part of the empirical research, is the evidence on advancing conclusion, and basis on summarizing view.Chapter6Conclusions and ImplicationsWe summarize the major conclusions, give an objective evaluation on VAT transformation, suggest for VAT transformation and the "Business tax changed to VAT" policy. Finally, we analyze the limitations and prospects for future research.The main conclusions of this study are as follows. Firstly, the VAT transformation improve enterprise’s scale of investment, but reduce enterprise’s efficiency of investment. Secondly, the effect of VAT transformation to over-invested enterprise is more significant. Thirdly, the VAT transformation reduced significantly investment efficiency of private enterprise, but not significant in state-owned enterprises.The possible contributions of this paper are as follows.Firstly, comprehensively text efficiency of enterprises investment which is in the regions and industries of VAT transformation. Then by the equity nature of the samples differentiate all enterprises as over-investment and under-investment. Different group of investment efficiency and different group of equity nature, there efficiency of investment is difference.Secondly, text the impact of VAT transformation efficiency of investment, and find that when over-investment and under-investment, in accordance with the equity nature of the samples were subdivided VAT transformation impact on efficiency of investment is difference.Due to the limitations from data and restrictions of model, the study cannot analyze the difference between high-tech enterprises and non-high-tech enterprises. Following, we can pay more attention to the limitations and restrictions. We can also combine with "Business tax changed to VAT" and income tax reform, research tax reform and its impact on the efficiency of investment. Finally, we can further explore the interactive effects of VAT transformation and efficiency of investment.