Trade Liberalization, Financial Flexibility, and Corporate Tax Avoidance

46 Pages Posted: 9 Sep 2013 Last revised: 17 Jun 2018

See all articles by Tao Chen

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: August 15, 2014

Abstract

We use import tariff reductions as a natural experiment to explore how trade liberalization causally affects the tax avoidance activities of U.S. firms. Using a Difference-in-Differences matching estimator approach, we find a significant increase in tax avoidance following tariff reductions. The positive effect of trade liberalization on tax evasion is more pronounced in firms that have less financial flexibility prior to the tariff cuts, but is mitigated by corporate governance and other external monitoring mechanisms. Our paper provides initial evidence to highlight the “dark side” and the unintended consequences of trade liberalization in motivating firms to evade more tax, particularly for firms in poor financial positions.

Keywords: Trade liberalization, Product market competition, Import tariff rate, Financial flexibility, Tax avoidance

JEL Classification: G15, G34, H26

Suggested Citation

Chen, Tao and Lin, Chen, Trade Liberalization, Financial Flexibility, and Corporate Tax Avoidance (August 15, 2014). Available at SSRN: https://ssrn.com/abstract=2322647 or http://dx.doi.org/10.2139/ssrn.2322647

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1A-08, Nanyang Avenue
Singapore, 639798
Singapore

Chen Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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