Stock Liquidity and Corporate Tax Avoidance

50 Pages Posted: 6 Sep 2013 Last revised: 4 Oct 2017

See all articles by Yangyang Chen

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Rui Ge

Shenzhen University - Shenzhen Audencia Business School

Henock Louis

Pennsylvania State University - Smeal College of Business

Leon Zolotoy

University of Melbourne - Melbourne Business School

Date Written: October 2, 2017

Abstract

We show that firms with higher stock liquidity engage less in extreme (i.e., either overly aggressive or overly conservative) tax avoidance. The effect of stock liquidity on tax avoidance is economically meaningful, is robust across alternative measures of tax avoidance and stock liquidity, and holds after controlling for potential endogenous effects. We further document that the effect of stock liquidity on tax avoidance is amplified for firms with high proportions of activist shareholders, and is attenuated for firms with high levels of stock price informativeness. Overall, our findings suggest that stock liquidity mitigates extreme tax avoidance by enhancing shareholders’ monitoring over firm management.

Keywords: Stock Liquidity, Tax Avoidance, Agency Conflicts

JEL Classification: G10, G30, M40

Suggested Citation

Chen, Yangyang and Ge, Rui and Louis, Henock and Zolotoy, Leon, Stock Liquidity and Corporate Tax Avoidance (October 2, 2017). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2320966 or http://dx.doi.org/10.2139/ssrn.2320966

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Rui Ge

Shenzhen University - Shenzhen Audencia Business School ( email )

Shenzhen
China

Henock Louis

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Leon Zolotoy (Contact Author)

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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