Unwilling or Unable to Disguise? How Does Clan Culture Reduce Tax Aggressiveness in China

Abstract

The persistence of traditional culture has long been discussed, while little is known about its impact on corporate aggressive tax planning. This paper examines the relation between clan culture and tax aggressiveness by focusing on the unique role of CEO, contrary to extant research on the topic. Our empirical evidence, from publicly traded firms in China during 2007–2020, suggests that China’s clan culture in CEO’s birthplace reduces the probability of aggressive tax planning, which is accordant to the prediction of our theoretical model. Using CEO turnover as a quasi-natural experiment, we employ the triple differences method to verify the causal effect. Moreover, we find clan culture could foster social trust among individuals, reducing CEO’s willingness to engage in aggressive tax planning. Further, we exclude the competitive explanation that clan culture could reduce accessibility and ability of tax planning, including political connections, social ties and financial expertise. Finally, our results suggest the persistence of the effect of clan culture, which is complementary to the development of formal institutions, public attention and marketization.

Keywords: Tax Aggressiveness; Clan; Traditional Culture; Informal Institutions

JEL Classification: G30, H26, O10, P20, Z10