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How does stock liquidity affect corporate tax noncompliance? Evidence from China✰

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  • Han Kim, E.
  • Lu, Yao
  • Shi, Xinzheng
  • Zheng, Dengjin

Abstract

Using an exogenous shock that drastically increased the liquidity of stocks listed in China, we find robust evidence that higher liquidity significantly increases the overall level of tax noncompliance. The increase is more substantial when controlling shareholders own more shares, and diversion for private benefits is less complementary to tax noncompliance. Liquidity has no significant impact on tax evasion—the most aggressive and risky tax noncompliance—and at the higher ends of the tax noncompliance distribution. The positive and significant effects are observed only at lower levels of tax noncompliance. We attribute the weaker impact of liquidity on aggressive tax noncompliance to diversion being more complementary to higher-risk tax noncompliance.

Suggested Citation

  • Han Kim, E. & Lu, Yao & Shi, Xinzheng & Zheng, Dengjin, 2022. "How does stock liquidity affect corporate tax noncompliance? Evidence from China✰," Journal of Comparative Economics, Elsevier, vol. 50(3), pages 688-712.
    • Handle: RePEc:eee:jcecon:v:50:y:2022:i:3:p:688-712
    DOI: 10.1016/j.jce.2022.01.008
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    More about this item

    Keywords

    Stock liquidity; Corporate tax noncompliance; Stock price informativeness; Share ownership; Diversion;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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