Controlling Shareholders’ Incentive and Corporate Tax Avoidance – A Natural Experiment in China
Journal of Business Finance & Accounting, Forthcoming
44 Pages Posted: 27 Feb 2014 Last revised: 12 Apr 2017
Date Written: February 12, 2017
The split share structure reform in China aligned the incentive of controlling shareholders with that of minority shareholders by granting trading rights to previously non-tradable shares. We find that the reform increases firms’ tax avoidance activities that are value-enhancing. However, the change in tax avoidance is only observed in state-owned firms where, compared to non-state-owned firms, the agency conflict between the controlling shareholder (the government) and minority shareholders is aggravated due to the fact that the former also serves as the tax claimant. Further, this effect is more pronounced in state-owned firms that are more likely to be influenced by the government prior to the reform. Finally, the reform reinforces a positive association between tax avoidance and firm value through an improvement in governance.
Keywords: tax avoidance, split share structure reform, agency conflict, controlling shareholder
JEL Classification: G18, G30, H25, H26
Suggested Citation: Suggested Citation