Corporate Tax Aggressiveness, Corporate Governance and Firm Value: Evidences from China

Abstract

Tax represents a significant cost to shareholders as well as to the firms, and it is generally expected tax aggressiveness are preferred. However, this argument ignores potential non-tax costs that could be associated with tax aggressiveness, especially those arising from agency problems and asymmetric information. This study investigates whether the tax planning activities is valued by shareholders as beneficial upon the nexus of institutional arrangements in place in China. An innovation of this study is making use of available tax reconciliation data to examine the effects of tax planning activities conducted by Chinese listed firms. Using a hand-collected sample of 229 publicly-listed firms for the financial years 2006-2012, we develop measures of abnormal book-tax differences (BTDs) as proxies for corporate tax aggressiveness. We find that the aggressive tax behavior is not perceived by shareholders as a value enhancing activity but in fact is value reducing. A consistent negative association between firm value and tax planning activities is found which is robust to a wide number of different controls and specifications as well as the inclusion of corporate governance measures; and the results are consistent with the agency cost theory of tax planning of Desai & Dharmapala (2006).

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Author Information
Tingting Ying, University of Nottingham, China
Wei Huang, University of Nottingham, China
Brian Wright, Xian Jiaotong Liverpool University, China

• Category: Economics and Management

Posted by James Alexander Gordon

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