Banking Liberalization and Corporate Tax Planning: Evidence from Natural Experiments

55 Pages Posted: 9 Aug 2022

See all articles by Shenglan Chen

Shenglan Chen

Zhejiang University of Technology

Hui Ma

Tongji University - School of Economics and Management

Haimeng Teng

Penn State Harrisburg

Qiang Wu

Hong Kong Polytechnic University-School of Accounting and Finance

Date Written: August 3, 2022

Abstract

This paper investigates whether banking liberalization affects corporate tax planning by exploiting China’s two interest rate deregulations as quasi-natural experiments. We find that firms reduce their level of tax avoidance following banking liberalization and that the identified effect is concentrated in firms with more bank borrowing after liberalization, firms located in non-financial centers, as well as non-SOE firms and firms with fewer political connections. In addition, we find that firms reduce their use of related party transactions and tax-related bribery after banking liberalization. Our results suggest that firms engage in less tax avoidance with more available/cheaper external financial resources and that, on average, the costs of engaging in tax avoidance are higher than the costs of borrowing from banks.

Suggested Citation

Chen, Shenglan and Ma, Hui and Teng, Haimeng and Wu, Qiang, Banking Liberalization and Corporate Tax Planning: Evidence from Natural Experiments (August 3, 2022). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4180917

Shenglan Chen

Zhejiang University of Technology ( email )

China

Hui Ma

Tongji University - School of Economics and Management ( email )

Siping Road 1500
Shanghai, Shanghai 200092
China

Haimeng Teng

Penn State Harrisburg ( email )

17036 (Fax)

Qiang Wu (Contact Author)

Hong Kong Polytechnic University-School of Accounting and Finance ( email )

5182095596 (Phone)
12047-4974 (Fax)

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