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Effects of financial risk on tax avoidance: Mechanisms and moderating effects

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  • Liu, Chunhua
  • Deng, Zihao
  • Ruan, Guanning
  • Tan, Kaihong

Abstract

Amid increasing macroeconomic pressure and tightening fiscal governance, how firms adjust their tax practices when facing financial distress has become a critical issue in theoretical research and policy practice. Using a panel dataset of A-share listed Chinese firms, this study examines the impact of corporate financial risk on tax avoidance. We construct a dual-path and dual-level empirical framework by introducing internal control quality and information disclosure as mediating variables, and local government debt governance as a moderating variable. The results reveal that financial risk significantly increases firms’ propensity to engage in tax avoidance, which is partially mediated by weakened internal controls and reduced disclosure quality. Furthermore, local governments’ debt governance has a significantly negative moderating influence that weakens the positive relationship between financial risk and tax avoidance. Robustness tests and instrumental variable estimations confirm the validity of our findings. This study enriches the literature on risk-driven factors and governance mechanisms in corporate tax practices and provides theoretical and policy insights for improving tax enforcement and strengthening fiscal governance.

Suggested Citation

  • Liu, Chunhua & Deng, Zihao & Ruan, Guanning & Tan, Kaihong, 2026. "Effects of financial risk on tax avoidance: Mechanisms and moderating effects," Finance Research Letters, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:finlet:v:93:y:2026:i:c:s1544612326001765
    DOI: 10.1016/j.frl.2026.109645
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    References listed on IDEAS

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