Short-Sale Deregulation and Corporate Tax Avoidance: Evidence From the Chinese Market

50 Pages Posted: 10 Jun 2020

See all articles by Yue Cao

Yue Cao

Hunan University - Business School

Yizhe Dong

University of Edinburgh Business School

Tianxiao Guo

Hunan University

Diandian Ma

University of Auckland Business School

Date Written: December 10, 2019

Abstract

We study how short selling affects corporate tax avoidance. By exploiting staggered short-sale deregulation on the Chinese stock market as a source of variation in market pressure and monitoring, our difference-in-differences estimates show that the introduction of a short-selling scheme significantly discourages pilot firms from engaging in tax avoidance. We also find that the negative effect of short selling on tax avoidance is more pronounced for firms that have high advertising costs and high institutional holdings and are located in weak tax law-enforcement regions. We further reveal that short selling has an indirect effect on tax avoidance through the additional external pressure exerted by auditors, media, and financial analysts. Our evidence highlights the monitoring and discipline roles that short sellers play in determining the level of corporate tax avoidance.

Keywords: short selling; corporate tax avoidance; monitoring; Chinese market

JEL Classification: G12, G14, G15, G18

Suggested Citation

Cao, Yue and Dong, Yizhe and Guo, Tianxiao and Ma, Diandian, Short-Sale Deregulation and Corporate Tax Avoidance: Evidence From the Chinese Market (December 10, 2019). Available at SSRN: https://ssrn.com/abstract=3602169 or http://dx.doi.org/10.2139/ssrn.3602169

Yue Cao

Hunan University - Business School ( email )

Changsha, Hunan 410082
China

Yizhe Dong (Contact Author)

University of Edinburgh Business School ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Tianxiao Guo

Hunan University ( email )

2 Lushan South Rd
Changsha, CA Hunan 410082
China

Diandian Ma

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

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