IDEAS home Printed from https://ideas.repec.org/a/bla/ausact/v35y2025i4p357-375.html

Tax Enforcement Independence and Firm Related‐Party Transactions: Evidence From a Quasi‐Natural Experiment

Author

Listed:
  • Xiao Chen
  • Yutong Sun

Abstract

Government intervention in tax authorities, which can compromise enforcement independence and undermine its governance role, remains a common challenge across both developed and emerging economies. This study examines how enhanced tax enforcement independence affects firm‐level related‐party transactions (RPTs) by leveraging China's State Tax Bureaus and Local Tax Bureaus merger as a quasi‐natural experiment. We find that greater tax enforcement independence significantly reduces RPTs, particularly abnormal ones. The effect is more pronounced in regions with lax enforcement and underdeveloped markets, and firms with weaker governance environments. The strengthening of enforcement power by tax authorities is an important influencing mechanism. Furthermore, the merger can filter out improper RPTs, thereby improving firms’ future financial performance and market value. Overall, our findings highlight the critical importance of safeguarding tax enforcement independence for corporate governance worldwide, providing valuable insights for tax system reform in various countries.

Suggested Citation

  • Xiao Chen & Yutong Sun, 2025. "Tax Enforcement Independence and Firm Related‐Party Transactions: Evidence From a Quasi‐Natural Experiment," Australian Accounting Review, CPA Australia, vol. 35(4), pages 357-375, December.
    • Handle: RePEc:bla:ausact:v:35:y:2025:i:4:p:357-375
    DOI: 10.1111/auar.70011
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/auar.70011
    Download Restriction: no
    File URL: https://libkey.io/10.1111/auar.70011?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Mihir A Desai & Dhammika Dharmapala, 2009. "Corporate Tax Avoidance and Firm Value," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 537-546, August.
    2. Amrita Dhillon & Silvia Rossetto, 2015. "Ownership Structure, Voting, and Risk," The Review of Financial Studies, Society for Financial Studies, vol. 28(2), pages 521-560.
    3. Peng, Winnie Qian & Wei, K.C. John & Yang, Zhishu, 2011. "Tunneling or propping: Evidence from connected transactions in China," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 306-325, April.
    4. Lin, Chen & Liu, Hang & Ni, Chenkai & Zhang, Bohui, 2023. "State Controlling Shareholders and Payout Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(5), pages 1943-1972, August.
    5. Christof Beuselinck & Marc Deloof & Ann Vanstraelen, 2015. "Cross-jurisdictional income shifting and tax enforcement: evidence from public versus private multinationals," Review of Accounting Studies, Springer, vol. 20(2), pages 710-746, June.
    6. Chen, Shenglan & Ma, Hui & Teng, Haimeng & Wu, Qiang, 2022. "Banking liberalization and corporate tax planning: Evidence from natural experiments," Journal of Corporate Finance, Elsevier, vol. 76(C).
    7. John Gallemore & Martin Jacob, 2020. "Corporate Tax Enforcement Externalities and the Banking Sector," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 58(5), pages 1117-1159, December.
    8. Mr. Matthieu Bellon & Ms. Era Dabla-Norris & Salma Khalid & Juan Carlos Paliza & Jillie Chang & Pilar Villena, 2022. "Digitalization and Tax Compliance Spillovers: Evidence from a VAT e-Invoicing Reform in Peru," IMF Working Papers 2022/057, International Monetary Fund.
    9. Nan Jia & Jing Shi & Yongxiang Wang, 2013. "Coinsurance Within Business Groups: Evidence from Related Party Transactions in an Emerging Market," Management Science, INFORMS, vol. 59(10), pages 2295-2313, October.
    10. Cheung, Yan-Leung & Qi, Yuehua & Raghavendra Rau, P. & Stouraitis, Aris, 2009. "Buy high, sell low: How listed firms price asset transfers in related party transactions," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 914-924, May.
    11. Bansal, Shashank & Singh, Harminder, 2023. "Does market competition foster related party transactions? Evidence from emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    12. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    13. Yost, Benjamin P. & Shu, Susan, 2022. "Does tax enforcement deter managers' self-dealing?," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    14. Wang, Hong-Da & Cho, Chia-Ching & Lin, Chan-Jane, 2019. "Related party transactions, business relatedness, and firm performance," Journal of Business Research, Elsevier, vol. 101(C), pages 411-425.
    15. Chen, Shawn Xiaoguang, 2017. "The effect of a fiscal squeeze on tax enforcement: Evidence from a natural experiment in China," Journal of Public Economics, Elsevier, vol. 147(C), pages 62-76.
    16. Nan Li, 2021. "Do Majority‐of‐Minority Shareholder Voting Rights Reduce Expropriation? Evidence from Related Party Transactions," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 59(4), pages 1385-1423, September.
    17. Abdullah Almutairi & Baban Eulaiwi & Robert Evans & Grantley Taylor, 2023. "Tax Haven Use and Related‐Party Transactions: Evidence from Australia," Australian Accounting Review, CPA Australia, vol. 33(4), pages 352-374, December.
    18. Liu, Lihua & Weng, Danyan & Zhang, Qin, 2023. "Unintended consequences of tax enforcement on corporate innovation: Evidence from a natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1292-1309.
    19. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
    20. Klassen, K & Lang, M & Wolfson, M, 1993. "Geographic Income Shifting By Multinational-Corporations In Response To Tax Rate Changes," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 31, pages 141-173.
    21. Bradshaw, Mark & Liao, Guanmin & Ma, Mark (Shuai), 2019. "Agency costs and tax planning when the government is a major Shareholder," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 255-277.
    22. Xu, Lingling & Huang, Xiaodi & Liu, Guanchun & Liu, Yuanyuan, 2023. "Tax authority enforcement and stock price crash risk: Evidence from China," Finance Research Letters, Elsevier, vol. 55(PA).
    23. Cheung, Yan-Leung & Rau, P. Raghavendra & Stouraitis, Aris, 2006. "Tunneling, propping, and expropriation: evidence from connected party transactions in Hong Kong," Journal of Financial Economics, Elsevier, vol. 82(2), pages 343-386, November.
    24. Bellon, Matthieu & Dabla-Norris, Era & Khalid, Salma & Lima, Frederico, 2022. "Digitalization to improve tax compliance: Evidence from VAT e-Invoicing in Peru," Journal of Public Economics, Elsevier, vol. 210(C).
    25. repec:bla:jfinan:v:59:y:2004:i:2:p:537-600 is not listed on IDEAS
    26. Liu, Guanchun & Liu, Yuanyuan & Zhang, Chengsi, 2022. "Tax enforcement and corporate employment: Evidence from a quasi-natural experiment in China," China Economic Review, Elsevier, vol. 73(C).
    27. Hongbin Cai & Qiao Liu, 2009. "Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms," Economic Journal, Royal Economic Society, vol. 119(537), pages 764-795, April.
    28. Tao Chen & Youchao Tan & Jinghua Wang & Cheng (Colin) Zeng, 2022. "The Unintended Consequence of Land Finance: Evidence from Corporate Tax Avoidance," Management Science, INFORMS, vol. 68(11), pages 8319-8342, November.
    29. Kohlbeck, Mark & Mayhew, Brian W., 2010. "Valuation of firms that disclose related party transactions," Journal of Accounting and Public Policy, Elsevier, vol. 29(2), pages 115-137, March.
    30. Le Zhao, 2023. "The Effect of Tax Authority Enforcement on Earnings Informativeness," European Accounting Review, Taylor & Francis Journals, vol. 32(1), pages 197-216, January.
    31. Cornaggia, Jess & Li, Jay Yin, 2019. "The value of access to finance: Evidence from M&As," Journal of Financial Economics, Elsevier, vol. 131(1), pages 232-250.
    32. Ming Jian & T. J. Wong, 2010. "Propping through related party transactions," Review of Accounting Studies, Springer, vol. 15(1), pages 70-105, March.
    33. Feng, Chen & Ye, Yongwei & Bai, Caiquan, 2023. "Tax enforcement and corporate financial irregularities: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 88(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yaowen Shan & Sue Wright, 2025. "International Experiences With Good Governance," Australian Accounting Review, CPA Australia, vol. 35(4), pages 307-308, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mishra, Rohan Kumar & Pattnaik, Debidutta & Hassan, M. Kabir & Chandra, Abhijeet, 2025. "Research on related party transactions (RPTs): a systematic review and bibliometric analysis," International Review of Economics & Finance, Elsevier, vol. 103(C).
    2. Mani, Satya Prakash & Bansal, Shashank, 2025. "Does board demographic diversity constrain related party transactions? Evidence from India," Pacific-Basin Finance Journal, Elsevier, vol. 90(C).
    3. Feng, Chen & Ye, Yongwei & Bai, Caiquan, 2023. "Tax enforcement and corporate financial irregularities: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 88(C).
    4. Qiaochao Yuan & Jun Bai, 2025. "Preventive regulation and corporate tax avoidance: Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 65(1), pages 819-856, March.
    5. Andrew M. Bauer & Junxiong Fang & Jeffrey Pittman & Yinqi Zhang & Yuping Zhao, 2020. "How Aggressive Tax Planning Facilitates the Diversion of Corporate Resources: Evidence from Path Analysis†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1882-1913, September.
    6. Zhang, Yan & Wu, Fang, 2025. "Tax enforcement and corporate overinvestment: Evidence from China’s STB-LTB merger," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 1212-1231.
    7. Chen, Yinghui & Chen, Miao & Huang, Yong, 2025. "Multiple large shareholders and cash holdings: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 103(C).
    8. Rohan Kumar Mishra & Frank Obenpong Kwabi & Abhijeet Chandra, 2025. "Corporate Social Responsibility, Related Party Transaction and Earnings Management: Evidence from India," Journal of Business Ethics, Springer, vol. 201(2), pages 331-369, October.
    9. Zhang, Fan & Wu, Guanghao & Zhu, Ling & Zhang, Wenzhe, 2023. "The impact of fiscal squeeze on corporate tax avoidance behaviors: Evidence from the agricultural tax reform," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 890-901.
    10. Tong, Pan & Chen, Xiao & Su, Jun, 2025. "State-owned enterprises dividend policy and subsidiary internationalization: A study based on the secondary agency problem," Research in International Business and Finance, Elsevier, vol. 75(C).
    11. Hu, Xingxing & Lin, Bingxuan & Liu, Huilong & Xu, Xiaowei, 2025. "Institutional voids and business group dynamics: Evidence from judicial reform in China11We gratefully acknowledge financial support from the National Natural Science Foundation of China (No. 71772039)，National Social Science Foundation of China (No.," Journal of Corporate Finance, Elsevier, vol. 95(C).
    12. Jiacai Xiong & Linghong Chen & Dongwei Su & Kejing Chen, 2025. "Tax Enforcement and Corporate Labor Income Share: Evidence From a Quasi‐Natural Experiment in China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 46(7), pages 3959-3975, October.
    13. Feng Huang & Jie Gao, 2022. "Customer and Tax Avoidance: How Does Customer Geographic Proximity Affect a Supplier’s Tax Avoidance?," Sustainability, MDPI, vol. 14(22), pages 1-30, November.
    14. Mai, Nhat Chi, 2020. "Related Party Transactions, State Ownership, the Cost of Corporate Debt, and Corporate Tax Avoidance: Evidence from Vietnam," OSF Preprints y5qj3, Center for Open Science.
    15. Chung, Heesun & Choi, Sunhwa & Jung, Woon-Oh, 2019. "Controlling shareholders' tax incentives and related party transactions," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    16. Tu, Wenjun & Du, Anna Min & Saddler, Sarah Borthwick, 2025. "Digital tax administration, investor risk perception, and stock return volatility," International Review of Economics & Finance, Elsevier, vol. 103(C).
    17. Li, Xinyu & Wang, Huacheng & Li, Rong, 2023. "A hidden channel of “blood transfusion”: Internal capital market subsidies and zombie firms," The British Accounting Review, Elsevier, vol. 55(6).
    18. Xu, Xiangbing & Dong, Nanyan & Wu, Chengzhang & Luo, Sicheng, 2025. "The employment effects of anticorruption: Evidence from China," Emerging Markets Review, Elsevier, vol. 66(C).
    19. Ding, Mingfa & Han, Yikai & Shen, Mi & Suardi, Sandy, 2025. "Political turnover and related party transactions in Chinese state-owned enterprises," Global Finance Journal, Elsevier, vol. 68(C).
    20. Wang, Changrong & Richardson, Grant & Cao, Yanming, 2024. "Long live the walking dead? Corporate tax avoidance and zombie firms in China," The British Accounting Review, Elsevier, vol. 56(3).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ausact:v:35:y:2025:i:4:p:357-375. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1035-6908 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.