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Corporate Tax Avoidance and Performance: Evidence from China's Listed Companies

Author

Listed:
  • Zhang Chen

    (Institute of Graduate Studies (IGS), University of Malaya)

  • Cheong Kee Cheok

    (Department of Economics, Faculty of Economics and Administration, University of Malaya)

  • Rajah Rasiah

    (Department of Development Studies, Faculty of Economics and Administration, University of Malaya)

Abstract

This paper examines the impact of corporate tax avoidance on firms’ financial performance. China is the country of focus because of its unique reform experience. The results using structural equation modeling (SEM) show that there is a significant negative direct relationship between tax avoidance and market value. It indicates that the opaque nature of China’s stock market creates ‘opportunities’ for managers using tax avoidance as an instrument to engage in rent seeking activities, which hurt shareholders’ value. However, this study also finds significant positive indirect relationships between tax avoidance and market value as it has stimulated firms’ growth and increase in profitability as the additional after-tax cash arising from tax avoidance has helped expand the firm’s market value. The results imply that tax avoidance can be a value-adding activity but for firms to appropriate its advantages, there is a need to strengthen internal supervision and management capability. Additionally, the State Administration of Taxation of China should enhance the legal provisions to prevent managerial rent extraction.

Suggested Citation

  • Zhang Chen & Cheong Kee Cheok & Rajah Rasiah, 2016. "Corporate Tax Avoidance and Performance: Evidence from China's Listed Companies," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 8(3), pages 61-83, July.
    • Handle: RePEc:umk:journl:v:8:y:2016:i:3:p:61-83
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    Citations

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    Cited by:

    1. Jie Sun & Lewis Makosa & Jinkun Yang & Fangyuan Yin & Lovemore Sitsha, 2023. "Does corporate tax planning mitigate financial constraints? Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 510-527, January.
    2. Roristua Pandiangan & Etty Murwaningsari, 2020. "Effect of Investment Decision and Tax Management on Stock Liquidity," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 9(3), pages 64-77, July.
    3. Ferchichi Jihene & Dabboussi Moez, 2019. "The Moderating Effect of Audit Quality on CEO Compensation and Tax Avoidance: Evidence from Tunisian Context," International Journal of Economics and Financial Issues, Econjournals, vol. 9(1), pages 131-139.
    4. Joshua Aronmwan, Edosa & Okafor, Chinwuba, 2019. "Corporate Tax Avoidance: Review Of Measures And Prospects," International Journal of Contemporary Accounting Issues-IJCAI (formerly International Journal of Accounting & Finance IJAF), The Institute of Chartered Accountants of Nigeria (ICAN), vol. 8(2), pages 21-42, September.

    More about this item

    Keywords

    Growth; market value; profitability; structural equation model; tax avoidance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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