Social Priorities, Institutional Quality, and Investment

Authors

Amar Gande, Southern Methodist University (SMU) - Finance DepartmentFollow
Kose John, New York University (NYU) - Leonard N. Stern School of BusinessFollow
Guanmin Liao, Renmin University of China - School of BusinessFollow
Lemma W. Senbet, University of Maryland - Robert H. Smith School of BusinessFollow
Xiaoyun Yu, Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); European Corporate Governance Institute (ECGI); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR)Follow

Publication Date

3-17-2024

Abstract

We provide a theoretical framework and empirical evidence characterizing positive and negative externalities that lead corporate investments to deviate from socially optimal levels. Limited liability organizational form combined with optimally designed corporate taxes and subsidies can induce socially optimal investments. A novel empirical prediction is that the quality of institutions can play an important moderating role. Our empirical work uses the setting from China with its five-year plans, private and SOEs and province-level differences in institutional quality. Our evidence shows that the level of corporate tax required to induce socially optimal investments is lower in the presence of high-quality institutions.

Document Type

Article

Keywords

social optimality, taxation, investment, legal systems, externalities, environmental protection, green investment, institutions

Disciplines

Finance

DOI

10.2139/ssrn.4762358

Source

SMU Cox: Finance (Topic)

Language

English