Frontiers in Business, Economics and Management 
ISSN: 2766-824X | Vol. 15, No. 3, 2024 

 

197 

Impact of Tax Incentive Policies on Corporate Financial 
Performance: Based on Data from Listed Companies 
from 2012-2016 

Guan Wang * 

School of International Finance and Trade, Shanghai International Studies University, Shanghai, China 

* Corresponding author: Guan Wang (Email: 567559@163.com) 

 

Abstract: In recent years, to promote the transformation and upgrading of enterprises and achieve high-quality economic 
development, China has continuously implemented tax incentive policies, which play an important role in stimulating enterprises 

to improve management capabilities and financial performance. This paper studies whether tax incentive policies affect the 

financial performance of enterprises. Based on previous literature, we select the financial data of A-share listed companies in the 

Cathay database from 2012 to 2016 as samples, considering companies with year-end tax rates below 25% as enjoying tax 

incentives. Using the model constructed in this paper for regression analysis, it is found that tax incentive policies indeed improve 

corporate financial performance. Due to industry characteristics and development differences, the promotion effect of tax 

incentive policies on corporate financial performance varies across industries, thereby providing policy suggestions for 

optimizing China's tax incentive policies and promoting corporate performance. 

Keywords: Tax Incentives, Financial Performance, Industry Characteristics, Ownership Concentration. 

 

1. Introduction 

After the 19th National Congress of the Communist Party 

of China outlined the 14th Five-Year Plan and the long-term 

goals for 2035, the strategic focus of China's economic 

development shifted towards building a new development 

pattern centered on domestic circulation while promoting 

mutual reinforcement between domestic and international 

circulation. This strategy aims to address the complex and 

ever-changing external environment brought about by 

economic globalization, particularly the challenges and 

obstacles posed by Western countries led by the United States 

to Chinese enterprises. In this context, how Chinese 

enterprises can maintain a steady pace of development in 

fierce market competition and enhance their financial 

performance in the constantly evolving global economic 

environment has become a pressing issue. 

As the main actors in the market economy, the 

improvement of corporate financial performance is not only 

crucial for the survival and development of the enterprises 

themselves but also an important indicator of the 

strengthening of national economic power. Taxation, being a 

significant cost in business operations, directly affects a 

company's cash flow and profitability, which in turn impacts 

investment decisions and long-term development strategies. 

Therefore, the optimization and adjustment of tax policies are 

of great significance for stimulating corporate vitality and 

promoting the improvement of corporate financial 

performance. 

In recent years, the State Taxation Administration has 

actively promoted the optimization and improvement of tax 

incentive policies. Measures such as reducing tax rates for 

technologically advanced manufacturing industries, 

implementing preferential tax rates for agricultural products, 

and exempting qualified agricultural producers from value-

added tax have effectively reduced the tax burden on 

enterprises, saving them significant operational costs. The 

implementation of these tax incentive policies has not only 

directly alleviated the economic pressure on enterprises but 

also guided more high-quality resources to flow into high-

efficiency industries by promoting the optimization of 

production activities and enhancing market competitiveness, 

thereby improving the overall asset allocation efficiency of 

society. 

Moreover, based on principal-agent theory, enterprises 

often face principal-agent problems in their operations, such 

as low operational efficiency, information asymmetry, and 

weak decision-making execution. These issues severely affect 

the financial performance and market competitiveness of 

enterprises. By implementing tax incentive policies, 

enterprises can use the savings from reduced tax expenses to 

increase managers' salaries, thus motivating their enthusiasm 

and innovative spirit, which in turn improves management 

efficiency and decision-making execution, further enhancing 

the financial performance of the enterprises. 

Therefore, this paper poses the following hypothesis: Do 

tax incentive policies truly promote corporate financial 

performance? 

2. Literature Review 

Tax incentive policies, as crucial tools for government 

economic regulation and promoting corporate development, 

have long been a focal point in academic research regarding 

their impact on corporate financial performance. In recent 

years, with economic globalization and evolving market 

environments, the effectiveness and mechanisms of tax 

incentive policies have become hot topics in research. Below 

are some representative research findings that provide 

theoretical foundations and empirical support for this study. 

Li Qiping (2022) utilized data from 127 listed companies 

between 2010 and 2020 to empirically analyze the impact of 

tax incentive policies on corporate operational performance. 

Li found that tax incentives not only enhance operational 

efficiency but also effectively reduce overall corporate risks. 



 

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This study is significant as it reveals the potential value of tax 

incentive policies in risk management, offering a new 

perspective on the relationship between tax incentives and 

robust corporate operations. 

Tang Hongxiang and Li Yinchang (2020) quantitatively 

analyzed the relationship between tax incentive policies and 

corporate performance using Return on Assets (ROA) and 

Return on Equity (ROE) as primary financial performance 

indicators. Their research results demonstrate a significant 

positive correlation between tax incentive policies and 

corporate performance, indicating that tax incentives are 

effective tools for enhancing corporate financial performance. 

This study's methodology provides a reliable analytical 

framework for subsequent research and emphasizes the 

positive role of tax policies in improving corporate 

performance. 

Cai Chang (2017) conducted an in-depth study on the 

relationship between property rights, tax burden, and 

corporate financial performance using data from Shanghai 

and Shenzhen A-share listed companies between 2008 and 

2013. Cai's empirical analysis revealed a significant negative 

correlation between tax burden and corporate financial 

performance, highlighting the role of tax burden as a "bridge" 

in influencing corporate investment decisions, capital 

structure, and operational efficiency. This study enriches our 

understanding of how tax burden affects corporate financial 

decisions and provides crucial reference points for designing 

tax incentive policies. 

These studies analyze the impact of tax incentive policies 

on corporate financial performance from various perspectives, 

providing multidimensional references for this study. 

Building upon these existing research findings, this study 

aims to further explore the differential effects of tax incentive 

policies across different industry backgrounds and propose 

strategies to optimize tax policies to promote long-term 

corporate development and balance among industries. 

3. Case Design  

3.1. Variable Definition 

Dependent Variable: Corporate Financial Performance 

(ROE). Referring to relevant studies by domestic and foreign 

scholars, the return on equity (ROE) is commonly used as an 

indicator to measure company performance. Return on Equity 

= Net Profit / Total Equity. It is a comprehensive financial 

indicator that reflects a company's ability to generate returns 

using owner's equity, and it indicates the efficiency of a 

company's financing, investment, and operational activities. 

The larger this value, the higher the corporate financial 

performance. 

Independent Variable: Tax Incentives (TAX). Dummy 

variable: Companies with an effective tax rate below 25% at 

the end of the year are considered to be enjoying tax incentive 

policies, marked as 1; otherwise, marked as 0. 

Control Variables: To better study the impact of tax 

incentives on corporate financial performance, this paper 

selects firm size (SIZE), leverage ratio (LEV), and ownership 

concentration (proportion of shares held by the largest 

shareholder, TOP1) as control variables. 

In summary, the various variable indicators selected in this 

paper are shown in the table below: 

Table 1. Model Variables 

Variable Type Variable Name Variable Symbol Variable Definition 

Dependent Return on Equity ROE Net profit for the year divided by book value of equity for the year 

Explanatory Tax Incentives TAX Recorded as 1 if year-end income tax rate is below 25%, otherwise 0 

Control 

Enterprise Size SIZE Natural logarithm of total assets of the enterprise 

Debt-to-Asset Ratio LEV Total liabilities of the enterprise divided by total assets 

Ownership Concentration TOP1 Proportion of shares held by the largest shareholder 

3.2. Model Construction and Variable 
Selection 

In response to the issues raised earlier and drawing from 

existing literature, this paper proposes the following model 

design: 

titt TAXROE ,ti,4ti,3ti,2,i10,i TOP1LEVSIZE  +++++=   

Here, i represents individual firms, t represents years, βi 

denotes regression coefficients, ε is the random disturbance 

term, and year effects are controlled. 

3.3. Data Source 

To effectively and comprehensively investigate the impact 

of tax incentives on corporate financial performance, this 

study selects financial data of A-share listed companies from 

2012 to 2016 as the research objects, sourced from the Guotai 

An CSMAR database. During data cleaning, financial 

industry data, ST-listed companies, and significant missing 

data for explanatory variables were excluded. Ultimately, a 

total of 12,802 valid sample data points were obtained. To 

mitigate the influence of outliers on empirical results, some 

variables underwent 1% winsorization. Data processing and 

analysis were conducted using Stata 17.0. 

4. Empirical Results and Analysis 

4.1. Descriptive Statistics of the Sample 

Empirical Results and Analysis 

(I) Descriptive Statistics of the Sample 

This study comprises 12,802 observed samples. The table 

2 below presents the statistical results of each variable. 

Table 2. Descriptive Statistics Results. 

Variable N Mean p50 SD Min Max 

ROE 12802 2.205 5.335 63.52 -5342 139.8 

TAX 12802 0.582 1 0.493 0 1 

SIZE 12802 10.82 10.72 1.032 8.161 16.72 

LEV 12802 42.70 41.45 21.55 4.900 90.39 

TOP1 12802 35.18 33.27 15.24 0.290 89.99 



 

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Based on the table above, the sample consists of 12,802 

observations from A-share listed companies during 2012-

2016. The average Return on Equity (ROE) is 2.205, with a 

maximum of 139.8 and a minimum of -5342, indicating 

significant variation in ROE among companies. Given the 

sample includes multiple industries, these differences may 

stem from industry-specific factors influencing ROE disparity. 

Looking at the control variables, companies in the sample 

show similar sizes (SIZE), but substantial variations in Debt-

to-Asset Ratios (LEV). Higher LEV indicates greater 

financial risk for companies. The average Ownership 

Concentration (TOP1) is 35.18, ranging from 0.290 to 89.99, 

highlighting considerable diversity in ownership 

concentration among firms. A well-structured ownership can 

effectively mitigate agency issues and enhance corporate 

performance. 

4.2. Variable Correlation Analysis 

To mitigate the influence of multicollinearity, the study 

conducted a correlation analysis of the variables, with results 

presented in Table 3. 

Table 3. Correlation Analysis Results 

 ROE TAX SIZE LEV TOP1 

ROE 1     

TAX 0.046*** 1    

SIZE 0.0130 -0.290*** 1   

LEV -0.124*** -0.308*** 0.357*** 1  

TOP1 0.045*** -0.075*** 0.177*** 0.063*** 1 

Note: ***, **, and * indicate significance at the 1%, 5%, 

and 10% levels, respectively. 

According to the results in the table above, the correlation 

coefficients among variables are all below 0.5, indicating 

weak correlations. There is a positive and significant 

correlation between Tax Incentives (TAX) and Return on 

Equity (ROE) at the 1% level, thereby providing preliminary 

support for the hypothesis in this study. 

The following sections will further examine the presence 

of multicollinearity among variables using variance inflation 

factor (VIF) analysis. The analysis results for each 

explanatory variable are presented in Table 4. 

Table 4. VIF Results 

Variable VIF 1/VIF 

tax 1.150 0.866 

size 1.270 0.788 

lev 1.220 0.820 

top1 1.040 0.959 

Mean VIF 1.440  

 

According to the results in the table above, the VIF values 

for all variables are below 10, indicating that there is no 

multicollinearity among the variables. Therefore, regression 

analysis can proceed. 

4.3. Regression Results and Analysis 

4.3.1. Empirical Results 
Using processed panel data spanning from 2012 to 2016, 

totaling 12,802 observations, a multiple regression analysis 

was conducted using Stata 17.0 to examine the impact of tax 

incentives on corporate financial performance. The estimated 

results are presented in Table 5. 

 

 

 

 

 

 

 

 

 

 

 

Table 5. Empirical Results Analysis 

 (1) 

VARIABLES ROE 

TAX 3.166*** 

 (2.83) 

SIZE 4.121*** 

 (4.41) 

LEV -0.422*** 

 (-6.35) 

TOP1 0.178*** 

 (6.30) 

Constant 
-29.881*** 

(-3.47) 

Observations 12,802 

R-squared 0.023 

F test 0 

r2_a 0.0219 

F 15.68 

 

Based on the empirical results from the table above, the 

regression coefficient between Tax Incentives (TAX) and 

Return on Equity (ROE) is 3.166, significant at the 1% level. 

This indicates that holding other factors constant, if a 

company benefits from tax incentives (where TAX equals 1), 

its ROE increases by 3.166 units. This finding suggests that 

tax incentives significantly enhance corporate financial 

performance, supporting the hypothesis. 

Furthermore, the coefficient for SIZE on ROE is 4.121, 

significant at the 1% level, indicating that holding other 

factors constant, a one-unit increase in enterprise size results 

in a 4.121 unit increase in ROE. Similarly, there is a 

significant positive correlation between Ownership 

Concentration (TOP1) and ROE. On the other hand, the 

relationship between Debt-to-Asset Ratio (LEV) and ROE is 

significantly negative, indicating that higher leverage leads to 

lower ROE for companies. 

4.3.2. Heterogeneity Analysis 
According to the China Securities Regulatory 

Commission's industry classification, China's industries are 

roughly categorized into 19 major sectors. Due to differences 

in industry nature and development levels, the impact of tax 



 

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incentives on corporate financial performance varies 

significantly across industries. For instance, industries like 

agriculture, forestry, animal husbandry, and fisheries are 

considered basic industries with longer profit cycles, and thus 

enjoy substantial tax incentives tailored to their industry 

characteristics. 

Table 6. Industry-specific Regression Results 

ROE TAX 

All Industries 
3.057** 

(1.226) 

Mining 
-8.110 

(5.103) 

Electricity, Heat, Gas and Water 

Production and Supply 

2.212 

(2.940) 

Real Estate 
-5.905* 

(3.137) 

Construction 
3.946** 

(1.989) 

Transportation, Warehousing and Postal 

Services 

-0.624 

(2.335) 

Education 
0.000 

(.) 

Scientific Research and Technical 

Services 

63.671* 

(36.284) 

Agriculture, Forestry, Animal 

Husbandry, and Fishery 

-1.907 

(3.855) 

Wholesale and Retail 
1.889 

(6.622) 

Water Conservancy, Environment and 

Public Facilities Management 

-1.023 

(1.883) 

Healthcare and Social Work 
2.047 

(7.187) 

Culture, Sports and Entertainment 
-3.667 

(2.941) 

Information Transmission, Software 

and Information Technology Services 

36.285** 

(16.684) 

Manufacturing 
5.081*** 

(1.312) 

Accommodation and Catering 
0.000 

(.) 

Leasing and Business Services 
3.268 

(3.659) 

Comprehensive 
2.315 

(7.048) 

 

According to the industry-specific regression results: 

In the real estate industry, tax incentives have a significant 

negative impact on corporate financial performance at the 10% 

level. In industries with slower development like agriculture, 

forestry, animal husbandry, and fishery, where significant tax 

incentives, including zero tax rates, are provided, the impact 

of tax incentives on innovation investment is not significant.  

In contrast, in the construction, scientific research and 

technical services, information transmission, software and 

information technology services, and manufacturing 

industries, tax incentives show a significant positive 

correlation with corporate financial performance at various 

levels. This indicates that the impact of tax incentives on 

corporate financial performance varies across different 

industries. 

5. Conclusion and Policy 
Recommendations  

5.1. Conclusion 

This study utilized financial data from A-share listed 

companies spanning from 2012 to 2016. Return on Equity 

(ROE) was selected as the dependent variable, with the 

criterion of companies enjoying tax incentives defined as 

having an annual income tax rate below 25%. Control 

variables included enterprise size, debt-to-asset ratio, and 

ownership concentration. Through multiple regression 

analysis, the study found that tax incentives enhance 

corporate financial performance. Additionally, the 

effectiveness of tax incentives varies across different 

industries. 

5.2. Policy Recommendations 

5.2.1. Innovate Tax Incentive Policies for Enhanced 
Effectiveness: 

Implement differentiated tax incentive policies tailored to 

specific products and demographic groups rather than 

adopting a uniform approach across industries. This approach 

can significantly reduce policy implementation costs. 

Furthermore, enhance the dissemination of tax incentive 

information, streamline approval processes, and improve 

service awareness, particularly in agriculture where 

information barriers exist. 

5.2.2. Optimize Ownership Structure for Long-term 
Development: 

The empirical analysis of this study clearly reveals a 

significant positive correlation between ownership 

concentration and Return on Equity (ROE). This indicates 

that an appropriate level of ownership concentration helps 

improve management efficiency and financial performance. 

Increasing ownership concentration can enhance the 

influence of major shareholders in corporate decision-making, 

thereby more effectively supervising the management, 

reducing agency costs, and increasing the efficiency of 

business decisions. 

When adjusting their ownership structure, companies 

should comprehensively consider industry characteristics, 

company size, and development stages to formulate 

adjustment strategies that suit their specific circumstances. By 

introducing long-term investors, optimizing equity 

distribution, and implementing equity incentive plans, 

companies can enhance the incentives and constraints on 

management, ensuring that corporate decisions align with 

long-term development goals. 

To address the principal-agent problem arising from the 

separation of ownership and control, companies need to 

establish robust internal supervision mechanisms. This can be 

achieved by setting up independent boards of directors, 

strengthening the functions of supervisory boards, and 

improving internal audit systems. These measures will 

increase corporate transparency and ensure that management 

actions align with the interests of all shareholders. 

Companies should enhance internal governance efficiency 

by optimizing decision-making processes, improving 

information flow, and strengthening employee training. This 

not only helps reduce internal friction but also promotes quick 

responses to market changes, enhancing competitiveness. 

Through these measures, companies will be able to 

optimize their internal governance structure, establish 

effective incentive and restraint mechanisms, promote the 

rational allocation and efficient use of internal resources, and 

achieve smooth internal operations, thereby creating greater 

value for shareholders. 

In addition to adjusting ownership structure, companies 

should also focus on cultivating corporate culture and values. 



 

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By establishing the right corporate values, guiding employee 

behavior, and fostering a positive corporate atmosphere, 

companies can lay a solid foundation for long-term stable 

development. 

Through these optimization measures, companies can not 

only improve their governance structure and operational 

efficiency but also maintain competitiveness in a complex and 

ever-changing market environment, achieving sustainable 

development. 

5.2.3. Increase Tax Incentives for High-tech and 
Manufacturing Talent Support: 

High-tech industries and manufacturing are crucial engines 

of economic development, and talent is the core resource 

driving the growth of these industries. The empirical analysis 

of this study indicates a significant positive correlation 

between tax incentive policies and the financial performance 

of companies in these sectors. This suggests that tax 

incentives can effectively enhance corporate financial 

performance, thereby promoting the healthy development of 

the entire industry. 

To further foster the growth of these key industries, the 

government needs to intensify tax incentives for talent. This 

not only involves reducing personal income tax rates to 

alleviate the tax burden on talent but also includes 

encouraging investment in education and skill training 

through tax incentives for both companies and individuals. 

Such policies can attract and retain highly skilled talent while 

stimulating their innovative potential, providing sustained 

momentum for the long-term development of the industry. 

When formulating tax incentive policies, the government 

should fully consider the fairness and sustainability of these 

policies. Ensuring that policies meet current development 

needs without adversely affecting future fiscal health is 

crucial. Additionally, tax incentive policies should be 

integrated with the overall industrial development strategy to 

create synergistic effects that promote industrial upgrading 

and optimize the economic structure. 

Through these measures, the government can effectively 

support the development of high-tech industries and 

manufacturing while ensuring the fairness and sustainability 

of talent policies, injecting lasting momentum into the 

nation's long-term economic growth. 

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