Short Selling and Corporate Tax Avoidance: Insights from a Financial Constraint View
50 Pages Posted: 24 Jan 2018 Last revised: 30 Dec 2019
Date Written: December 30, 2019
Abstract
This paper examines the effect of short selling on corporate tax avoidance. We propose a financial constraint view, that short selling triggers corporate insiders’ incentive to avoid taxes for funding investment opportunities in emerging markets. Employing staggered short-sale deregulation on the Chinese stock market as quasi-exogenous shocks, we find that the deregulation of short-sales reduces firms’ cash effective tax rates and effective tax rates by 11.8% and 21.1%, respectively. This effect is especially prominent for financially constrained firms and non-state-owned firms. We further show that short-sale deregulation indeed increases the cost of equity capital of Chinese listed firms. These results suggest that tax avoidance helps to generate additional funds and mitigates financial constraints under downward price pressure in emerging markets that have strong government intervention and lax law enforcement.
Keywords: Short Selling; Short-Sale Deregulation; Tax Avoidance; Financial Constraint; Emerging Market
JEL Classification: G31; G32; G38
Suggested Citation: Suggested Citation