Does the supply of tax information affect financial restatements? Evidence from the launch of Taxation Administration Information System III in China

Abstract

Financial restatements significantly measure financial reporting quality, introducing uncertainty, undermining trust, and triggering adverse reactions in financial markets. This paper examines how the supply of tax information affects financial restatements. The literature lacks compelling evidence about the relationship between tax information and financial restatements. From one perspective, enhancing the transparency of corporate tax information can diminish the occurrence of financial restatements. From another perspective, increasing the accessibility of tax information could lead to increased financial restatements. We reconcile these competing associations, exploiting a natural experiment induced by the rollout of Taxation Administration Information System III (CTAIS-3) in China. Using a difference-in-difference approach, we find that firms in areas implementing CTAIS-3 experience a significant decrease in financial restatements. Our results remain robust across various indicators of financial reporting quality. Furthermore, we demonstrate that information asymmetry is a driving factor behind our results, emphasizing the government’s proactive role in enhancing the quality of corporate financial disclosure.