Can value-added tax refund policy inhibit corporate financial fraud? Evidence from China

Abstract

This paper examines the impact of China's 2018 VAT refund policy on corporate financial fraud, using a difference-in-differences approach. Findings demonstrate that the policy significantly reduces corporate financial fraud, which is confirmed through various robustness tests. The VAT refund policy deters corporate financial fraud by addressing motivational pressures, limiting opportunities, and challenging justifications, effectively targeting the fraud triangle's core elements. The policy's effects are especially strong in high-tech and privately-held firms. The study extends knowledge of VAT policies' roles in corporate decision-making and offers policy guidelines to combat corporate malfeasance.