Short Selling and Corporate Tax Avoidance: Insights from a Financial Constraint View

50 Pages Posted: 24 Jan 2018 Last revised: 30 Dec 2019

See all articles by Jinbo Luo

Jinbo Luo

Jiangxi University of Finance and Economics

Xiaoran Ni

Xiamen University - School of Economics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

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

Luo, Jinbo and Ni, Xiaoran and Tian, Gary Gang, Short Selling and Corporate Tax Avoidance: Insights from a Financial Constraint View (December 30, 2019). Available at SSRN: https://ssrn.com/abstract=3108510 or http://dx.doi.org/10.2139/ssrn.3108510

Jinbo Luo

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Xiaoran Ni (Contact Author)

Xiamen University - School of Economics ( email )

D204
Economic Building
Xiamen, Fujian 361005
China

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

Xiamen
China

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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