Tax Avoidance and Tunneling: Empirical Analysis from an Agency Perspective

Posted: 22 Apr 2016 Last revised: 19 Oct 2017

See all articles by K. Hung Chan

K. Hung Chan

Lingnan University - Department of Accountancy

Phyllis Mo

City University of Hong Kong (CityU) - Department of Accountancy

Tanya Y. H. Tang

Brock University

Date Written: January 16, 2016

Abstract

Taking advantage of the agency conflicts between controlling shareholders and minority shareholders and the weak corporate governance in a transition economy, we investigate the relationship between tax avoidance (proxied by effective tax rates) and tunneling (proxied by related-party lending) from a principal-principal agency perspective. We find that corporate tax avoidance is positively associated with tunneling after controlling for firm characteristics, corporate governance, and institutional factors that affect tunneling. This relationship is more pronounced for firms with cash shortages and in periods with relatively weak investor protection. In addition, the value-enhancing implications of tax avoidance are reduced for firms in which tax avoidance is highly correlated with tunneling. By demonstrating the existence of tunneling-related tax avoidance and its economic consequences, this study sheds light on the emerging agency perspective on tax avoidance.

Keywords: Tax avoidance; Tunneling; Firm value; Principal-principal agency conflicts

JEL Classification: G18; H20; M41

Suggested Citation

Chan, K. Hung and Mo, Phyllis and Tang, Tanya Y. H., Tax Avoidance and Tunneling: Empirical Analysis from an Agency Perspective (January 16, 2016). Journal of International Accounting Research, 15(3): 49-66., Available at SSRN: https://ssrn.com/abstract=2765760

K. Hung Chan

Lingnan University - Department of Accountancy ( email )

Phyllis Mo

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Tanya Y. H. Tang (Contact Author)

Brock University ( email )

500 Glenridge Ave.
St. Catherines, On L2S 3A1
Canada

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