Effects of Advanced Information Technology in Tax Enforcement on Financial Reporting Quality: Evidence from a Quasi-Natural Experiment in China

The application of information technology in tax enforcement represents a paradigmatic case of crowd science within government administration, facilitating the adoption of sound governance principles and the achievement of policy objectives through the enhanced deployment of information technologies. This study empirically examines the impact of advanced information technology in tax enforcement, a critical component of government modernization, on the quality of financial reporting. To establish causality, we leverage the staggered implementation of Stage Three of the Golden Tax Project (GTP-3) as a quasi-natural experiment, which integrates modern information technologies into tax enforcement processes. The difference-in-differences estimation results indicate that GTP-3 significantly curtails corporate earnings manipulation. This effect is particularly pronounced in firms taxed by local taxation bureaus, state-owned enterprises, and those with stronger political connections. Moreover, GTP-3 effectively mitigates the crash risk of stock prices for firms subject to its provisions. Overall, our study contributes to the understanding of how crowd science, such as those deployed in tax enforcement, can improve the information quality of the capital market and intersect with broader societal dynamics.