Can Value-Added Tax Refund Policy inhibit Corporate Financial Fraud？Evidence from China.

Utilizing the "Finance and Taxation [2018] No.70" document issued by the Chinese government in 2018 as an instrumental quasi-natural experiment, this paper employs a difference-in-differences (DID) methodology to investigate the influence of the value-added tax refund policy (VATRP) on corporate financial fraud. Empirical results robustly indicate that VATRP markedly curtails corporate financial fraud, a finding that endures a series of rigorous robustness checks, including a placebo test, propensity score matching, parallel trend analysis, and considerations of the sample time frame. The mechanism analysis shows that VATRP mitigates corporate financial fraud by alleviating motivational pressures, reducing opportunistic avenues, and negating rationalizations effectively addressing the three foundational components of the fraud triangle. Further examinations reveal that the suppressive effects of VATRP are particularly significant among high-tech and private capital holding firms. Theoretically, this paper enriches the discourse on VATRP by linking it to corporate financial decision-making, thereby broadening the scope of existing literature. Practically, it provides substantive policy recommendations, suggesting how governments could strategically implement fiscal policies to curb corporate malfeasance.