An examination of the relationship between implicit taxes and market structure: Evidence from Chinese listed companies

ABSTRACT An implicit tax is a reduction in the pre-tax rate of return driven by tax preferences on an investment. The extant research demonstrates existence of implicit taxes at corporate level, but prior studies have drawbacks in tax preferences measure. This study takes the unique advantage of Chinese corporate tax rate preference setting to address research method problems. By employing the propensity score matching and multivariate regression analysis, we demonstrate the existence of implicit taxes in Chinese listed firms and the market structure impedes the realisation of implicit taxes. The market power and market concentration reduce the negative effect of tax preferences on the firm’s pre-tax rate of return.