Tax incentives and the formation of zombie firms

Due to the serious problem of overcapacity in China, we empirically analyse the impact of tax incentives on the formation of zombie firms. Using a sample of Chinese A-share listed firms from 2009 to 2019, we demonstrate that tax incentives can significantly inhibit the formation of zombie firms through innovation investments. Furthermore, heterogeneity analysis shows that this inhibitory effect is stronger for non-state-owned firms and firms in the eastern region than for other firms.