Aggressive Tax Planning and Stock Price Synchronicity: Evidence from China

Abstract

This paper investigates the relationship between aggressive tax planning and stock price synchronicity in China. We find a statistically significant and positive association between aggressive tax planning and stock price synchronicity. Aggressive tax planning facilitates managerial rent extraction. Because any material information about risky tax transactions tends to be hidden in various tax accruals accounts, aggressive tax strategies make financial statements less transparent and difficult for investors and analysts to understand, thereby increasing information asymmetry between insiders and outsiders and decreasing stock price informativeness. We also find that a 2008 tax regulation change in China moderates the association between tax planning and price synchronicity. Finally, we document that high quality auditing mitigates the damaging effects of aggressive tax planning on stock price informativeness. Overall, our findings highlight the information-based interpretation of stock price synchronicity.

Keywords: Aggressive tax planning, stock price synchronicity, corporate opacity, high-quality auditor

JEL Classification: G12, G14, H26, M41