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| Unintended Effects of the Merger of State and Local Taxation Administrations: Empirical Evidence from Audit Pricing |
| Chen Shuaidi1, Liu Qiang2, Han Hongling3 |
1.Alibaba Business School, Hangzhou Normal University, Hangzhou 311121, China
2.School of Economics, Zhejiang University, Hangzhou 310058, China
3.School of Management, Zhejiang University, Hangzhou 310058, China |
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Abstract Against the backdrop of 2018 merger of China’s state and local taxation administrations, this study systematically examines the impact of this major tax collection and administration institutional reform on corporate audit pricing as well as its transmission mechanisms. Unlike prior studies that primarily focus on the reform’s direct effects on corporate tax burdens, tax compliance, or financing efficiency, this paper adopts the perspective of third-party audit institutions—key external governance actors—to explore the institutional spillover effects of the reform. It further reveals how auditors adjust their risk assessments and audit pricing in response to the changes in the tax administration system. Identifying whether and how the merger of state and local taxation administrations influences audit pricing enhances our understanding of the governance implications of China’s fiscal and tax modernization.Drawing on a sample of non-financial A-share listed firms in Shanghai and Shenzhen from 2012 to 2020, the study employs a difference-in-differences research design to systematically evaluate the impact of the tax administration reform on audit pricing and to uncover its transmission channels. The empirical results show that the merger significantly reduces audit fees, suggesting that the reform reshapes auditors’ perceptions of tax-related risks and corporate information quality, thereby affecting the allocation of audit effort. A series of pla cebo tests, alternative variable and model specifications, controls for concurrent tax policies, and comprehensive sensitivity and robustness checks consistently confirm the reliability of the causal findings.The mechanism analysis identifies two primary transmission channels—risk mitigation and information governance. First, through the lens of risk mitigation, the merger improves firms’ tax compliance and reduces the complexity of tax-related matters, leading auditors to perceive lower tax uncertainty and ultimately reduce required audit work. Second, regarding information governance, the reform significantly decreases leverage manipulation and corporate violations, lowers the likelihood of financial restatements, and enhances overall disclosure quality, indicating that strengthened external oversight effectively improves the corporate information environment.Heterogeneity analyses further show that the reform’s effect on audit pricing varies across institutional contexts and firm characteristics. The reduction in audit fees is more pronounced in regions with weaker tax enforcement and poorer government–business relations, as well as among private firms, smaller firms, and firms in traditional industries. Moreover, when firms are audited by larger accounting firms or when auditor tenure remains continuous, the information effects generated by the reform are more readily identified and more fully incorporated into audit pricing.This study makes three major contributions. First, it identifies the institutional spillover effects of the merger of state and local taxation administrations from the perspective of auditors as external governance agents, thereby expanding the research frontier on the economic consequences of tax administration reforms. Second, it constructs a dual-mechanism framework—risk mitigation and information governance—to reveal how changes in the tax administration system reshape auditors’ risk-assessment logic, enriching the institutional underpinnings of audit pricing research. Third, by documenting the contextual heterogeneity of the reform’s effects, the study provides valuable micro-level evidence to inform differentiated policy design in tax administration and audit regulation.Overall, this research demonstrates the deep spillover effects of tax governance reforms on the audit market and offers new empirical and theoretical insights into how major public policies influence third-party intermediaries through changes in risk and information environments.
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Received: 28 March 2025
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2026, Vol. 56 
