Takeover Threats and Corporate Tax Avoidance: Evidence from Market-Oriented Control Reform in China

The passage of the merger and acquisition (M&A) policy introduces a shock to takeover threats, which serve as exogenous factors influencing tax avoidance incentives at the firm level. We investigate the impact of takeover threats induced by market-oriented control reform on corporate tax avoidance through a difference-in-differences (DID) design. Empirical results suggest a strong and negative relationship between takeover threats and corporate tax avoidance, and the findings are robust after various robustness checks and endogeneity discussions. Takeover threats may reduce corporate tax avoidance by mitigating inter-period profit shifting and curbing abnormal related party transactions, supporting the governance channel rather than the pressure channel. In the samples of non-state-owned firms, poor external audit quality, weak regional law enforcement, and a more active M&A market, the negative effect of takeover threats on corporate tax avoidance is more pronounced. Our findings enrich the research by focusing on the role of takeover threats arising from China’s market-oriented control reform in constructing cross-sectional variation in tax avoidance.