ABSTRACT Leveraging the exogenous shock of the implementation of China's Environmental Protection Tax Law, this study empirically examines the impact of green tax reform on corporate R&D manipulation. Using the sample of Chinese listed firms and employing a difference‐in‐differences approach, we find that green tax reform significantly curbs corporate R&D manipulation, specifically by reducing abnormal R&D expenditures. This conclusion remains robust after a series of tests. Mechanism analyses reveal that this effect operates primarily through three channels: the optimization of environmental information disclosure, enhanced supervisory governance by external stakeholders, and the reduction of transaction costs associated with regulatory compliance. Further analysis suggests that by mitigating R&D manipulation, green tax reform ultimately enhances both the quality and efficiency of corporate innovation. Our findings contribute to the growing literature on environmental regulation and corporate innovation by highlighting the governance role of green taxation, and provide important policy implications for designing market‐based environmental instruments to foster genuine and sustainable innovation.
Li et al. (Mon,) studied this question.