Title: Does Environmental Tax Affect Information Environment? Evidence from Timely Loss Recognition

Authors: Haijie Huang (East China Normal University), Edward Lee (The University of Manchester), Qi Lin (Guangzhou University), Changjiang Lyu (Fudan University)

Abstract: We examine whether and how firms adjust their timely loss recognition following the introduction of environmental tax. On the one hand, there is consensus in the literature that taxation would generally incentivize timely loss recognition to delay income and decrease current tax payment. On the other hand, environmental tax could also disincentivize timely loss recognition as a result of the reduction political costs firms incur from their pollution. Our identification strategy exploits the initiation of environmental tax in China from 2018 onward. Among our treatment (control) group based on firms in higher (lower) pollution industries, we observe a significant decrease (increase) in timely loss recognition, which is consistent with the political cost mitigation (tax burden escalation) effect. Our study provides policy implication by showing that environmental tax could generate negative externalities on financial reporting incentives and adversely affect the information environment of the capital market.