Transportation Infrastructure Development and Tax Avoidance: Evidence From a Quasi-Natural Experiment

Posted: 3 Feb 2020 Last revised: 11 Feb 2021

See all articles by Lyu Fan

Lyu Fan

Deakin University

Caiyue Ouyang

Beijing Jiaotong University

Jeffrey Pittman

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

Jiacai Xiong

Jiangxi University of Finance and Economics

Jun Yao

Deakin University

Date Written: February 11, 2021

Abstract

Analyzing the launch of high-speed rail (HSR) services in China as a quasi-natural experiment, we identify a positive externality stemming from the development of transportation infrastructure: the reduction in firms’ value-destroying tax avoidance. Specifically, we find that after the opening of HSR lines to the cities where firms are located, information asymmetry subsides and firms undertake less tax avoidance, which leads to enhanced firm value. In another result consistent with expectations, we document that the impact of the introduction of HSR lines on tax avoidance is concentrated in firms in which insiders exhibit a high propensity to extract rents through aggressive tax strategies. Moreover, we find that the importance of the opening of HSR lines to firms’ tax avoidance is mediated by income shifting, which is the primary technique through which insiders in China elicit private benefits and reduce taxes. Additionally, we also identify the increase in the intensity of site visits that are conducted by institutional investors and financial analysts as an important force that causes the reduction of tax avoidance after the launch of HSR lines. Our results imply that improving transportation infrastructure reduces the cost of external monitoring, which constrains insiders from siphoning private benefits under the guise of tax avoidance that benefits all shareholders as the residual claimants.

Keywords: high-speed railway, geographic proximity, tax avoidance; agency problem

JEL Classification: G34, H26, H54, O18

Suggested Citation

Fan, Lyu and Ouyang, Caiyue and Pittman, Jeffrey A. and Xiong, Jiacai and Yao, Jun Alex, Transportation Infrastructure Development and Tax Avoidance: Evidence From a Quasi-Natural Experiment (February 11, 2021). Available at SSRN: https://ssrn.com/abstract=3516977

Lyu Fan

Deakin University ( email )

75 Pigdons Road
Victoria, Victoria 3216
Australia
3125 (Fax)

Caiyue Ouyang

Beijing Jiaotong University

China

Jeffrey A. Pittman

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)

Jiacai Xiong

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China
330013 (Fax)

Jun Alex Yao (Contact Author)

Deakin University ( email )

Burwood, Victoria 3215
Australia

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