Controlling Shareholders’ Incentive and Corporate Tax Avoidance: A Natural Experiment in China

31 Pages Posted: 5 May 2017

See all articles by Oliver Zhen Li

Oliver Zhen Li

National University of Singapore (NUS)

Hang Liu

Dongbei University of Finance and Economics

Chenkai Ni

Fudan University

Multiple version iconThere are 2 versions of this paper

Date Written: May/June 2017

Abstract

The split share structure reform removes a significant market friction in China’s capital market by allowing previously non‐tradable shares to be freely tradable at market prices. Such a reform reduces the agency conflict between controlling shareholders and minority shareholders as the former now care more about stock prices. We find that state‐owned firms, but not non‐state‐owned firms, significantly increased their tax avoidance activities after the reform. We attribute this differential effect to the dual role of the government as state‐owned firms’ controlling shareholder as well as the tax claimant. Further, this effect is more pronounced for 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. Overall, our study suggests that when controlling shareholders are more concerned about stock prices, state‐owned firms engage more in tax avoidance activities to enhance firm value.

Keywords: tax avoidance, split share structure reform, agency conflict, controlling shareholder

Suggested Citation

Li, Oliver Zhen and Liu, Hang and Ni, Chenkai, Controlling Shareholders’ Incentive and Corporate Tax Avoidance: A Natural Experiment in China (May/June 2017). Journal of Business Finance & Accounting, Vol. 44, Issue 5-6, pp. 697-727, 2017. Available at SSRN: https://ssrn.com/abstract=2962704 or http://dx.doi.org/10.1111/jbfa.12243

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Hang Liu

Dongbei University of Finance and Economics ( email )

Dalian, 116025
China

Chenkai Ni

Fudan University ( email )

Guoshun Road 670
Yangpu
Shanghai, Shanghai 200433
China

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