Digital tax administration, investor risk perception, and stock return volatility

Abstract

This study investigates the impact of digital tax administration on stock return volatility amid heightened market uncertainty. Leveraging the staggered rollout of China's Golden Tax Phase III from 2013 to 2016 as a quasi-natural experiment, we employ a Difference-in-Differences approach on a sample of Chinese listed firms over the period 2010 to 2022. We find that the implementation of digital tax administration significantly alleviates stock return volatility. This stabilizing effect is primarily attributed to reduced investors' perceived risks, which arise from enhanced information transparency, mitigated agency conflicts, and alleviated financial constraints. Drawing upon agency theory and institutional theory, we find that this stabilizing effect is more salient in regions with weaker initial institutional environments (i.e., low tax enforcement efforts, weak legal institutions, and low social trust). Our findings indicate that digital tax administration, as a potent external governance mechanism, can compensate for existing institutional deficiencies. Our study provides crucial insights into the role of digital tax administration in promoting market stability and enhancing corporate governance across diverse regional contexts. Our study is important for both policymakers and firm managers, indicating that leveraging digital tax administration can enhance stock market stability by improving regulatory effectiveness and guiding firms' strategic resource allocation in volatile environments.