Short-Sale Deregulation and Corporate Tax Avoidance: Evidence From the Chinese Market
50 Pages Posted: 10 Jun 2020
Date Written: December 10, 2019
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
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