How Aggressive Tax Planning Facilitates the Diversion of Corporate Resources: Evidence from Path Analysis

51 Pages Posted: 30 Mar 2015 Last revised: 8 Aug 2019

See all articles by Andrew M. Bauer

Andrew M. Bauer

University of Waterloo - School of Accounting and Finance

Junxiong Fang

Fudan University - School of Management

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Yinqi Zhang

American University

Yuping Zhao

University of Houston

Multiple version iconThere are 2 versions of this paper

Date Written: July 29, 2019

Abstract

In measuring tunneling with inter-corporate loans disclosed by Chinese listed companies, we analyze the underlying channels through which aggressive tax planning facilitates the diversion of corporate resources by firm insiders. Using path analysis, we document that the path from tax aggressiveness to related loans is mediated by both the additional cash flows from tax savings and the increased financial opacity from tax planning, and that additional cash flows plays a much more important role than opacity at helping controlling shareholders to divert corporate resources under the guise of tax aggressiveness. Beyond the two mediated paths, we also detect a residual, direct path from tax aggressiveness to related loans. After the exogenous shock from the government crackdown on diversionary related loans, we find the direct path is fully mediated by the two indirect paths, suggesting that tunneling via related loans only occurs at firms where insiders can mask tunneling under the cover of opacity or can justify related loans on grounds of abnormal cash flows from tax savings. Our evidence supports the notion that greater outside scrutiny increases the hurdle for, but does not entirely eradicate, diversion facilitated by tax aggressiveness. Collectively, our research lends some support to recent theory on the importance of taxes to corporate governance by demonstrating how the agency costs of tax planning allow certain shareholders to benefit from firm activities at the expense of others.

Keywords: tunneling; tax aggressiveness; self-dealing; monitoring

JEL Classification: M41

Suggested Citation

Bauer, Andrew M. and Fang, Junxiong and Pittman, Jeffrey A. and Zhang, Yinqi and Zhao, Yuping, How Aggressive Tax Planning Facilitates the Diversion of Corporate Resources: Evidence from Path Analysis (July 29, 2019). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2586818 or http://dx.doi.org/10.2139/ssrn.2586818

Andrew M. Bauer

University of Waterloo - School of Accounting and Finance ( email )

200 University Ave W
Waterloo, Ontario N2L 3G1
Canada

Junxiong Fang

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Yinqi Zhang

American University ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States

Yuping Zhao

University of Houston ( email )

334 Melcher Hall
Houston, TX 77204
United States
713-743-2166 (Phone)
713-743-4828 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
324
Abstract Views
1,509
rank
93,369
PlumX Metrics